Retiring on target

If you're the prudent type, there's a good chance that you're saving for retirement - almost half of all adults are, according to a survey released this month by AMP.

To be precise, 47 per cent of the 489 people aged 18-plus surveyed by AMP said they were putting something aside for life after work.

Assuming, just for a moment, that people tell the truth when the pollsters come calling, that makes us sound like a rather responsible lot.

But the answers were less reassuring when the survey asked the savers whether they knew how much they would need to accumulate by retirement, to provide the income they hoped to live on.

"Don't know" said 43 per cent of savers. And, of those who did nominate a savings target, AMP reckons that only one in five has a reasonable chance of achieving it.

For many people, the answer to the "how much to save" question will be "whatever's left over".

But if you want to be a little more precise, and a little more certain about the level of comfort you'll enjoy in retirement, it's worth working out a savings target.

Given that saving is a long-term business, such a target can only ever be approximate, but it can give an idea of how much you need to put aside and, if you're already saving, whether you're on the right track.

There's no shortage of resources to help you make the calculations. But before grappling with the numbers, there are some basic questions to ponder:

* How much will you need? You could work out what your budget is likely to be after you finish work, though that's likely to be a guessing game if retirement is any way off. You could decide you'll be happy with some percentage of your current income. Or you could just aim to be better off than most other people - according to census information, most retirees live on NZ Superannuation and not much more.

* How much will the government pay? NZ Super now pays $19,103 a year or $367 a week for a couple, after tax (assuming you have no other income), and $12,417 a year or $238.80 a week for a single person living alone.

There are several other rates, depending on your circumstances.

Whether you want to include super in your retirement calculations is your call.

The Government has promised that NZ Super will continue at age 65, with the married couple rate equal to 65 per cent of the net average wage.

If you have faith in that arrangement continuing, think of anything you save as being in addition to your super payments.

But if you're sceptical, you may want to ignore super in making your calculations.

* What about the house? It's the biggest asset most people own, but you can't eat it. If you think you'd be happy to sell and trade down when you retire, you can include the potential profit in your plans. If not, leave the house out of the calculations.

* What about the kids? Retirement calculators typically assume you plan to gradually spend all your savings after you quit work. If you hope to die with something in the bank for your children, you'll have to save more or live on less in retirement.

* How much will your savings earn? The Retirement Commissioner uses a figure of 2.5 per cent a year, after tax and inflation. It may not sound like much, but history suggests that's not an unreasonable return to expect, over time and from a diversified range of investments. The table above assumes a return of 3 per cent, again after tax and inflation.

* When do you want to retire? "Sooner" is the usual answer; 30 per cent of the people in the AMP survey planned to quit work between the ages of 50 and 60, another 35 per cent thought 60 to 65 would be a good time and only 8 per cent planned to work past 65.

While that's an understandable impulse, it could be an expensive one. If you're single and aiming for an after-tax retirement income of $30,000 a year (NZ Super included) you'll need to accumulate $238,400 by the time you stop work at 65, according to the assumptions used in calculating the table. If you retire five years sooner, you'll need to amass $347,200 to provide the same income.

* How long do you plan to live? You may have only limited control over the answer to that question but, for the record, a statistically average 65-year-old man can expect 16 years or so of retirement. For women the figure is 19 years.

After thinking through the issues, you can start number-crunching - a task which has been made much less daunting than it once was, thanks to the internet.

There's no shortage of retirement calculators on the net, but two of the best are to be found at the website of the Retirement Commissioner (www.sorted.org.nz - click on "retirement") and the home of opinionated economist Gareth Morgan (www.garethmorgan.co.nz - click on "calculators / quizzes").

If you're not into the internet - and you're prepared for some maths - the Consumers' Institute publication "Your future nest-egg" has detailed instructions on doing the numbers.

Or have a look at the table above, which shows how big a lump sum you need to accumulate to produce various income levels (including NZ Super), and how much you need to save weekly to reach that goal.

All the figures are in today's dollars - if you're aiming for an income of $30,000, for example, that's enough to buy whatever $30,000 buys now.

The figures assume you retire at 65, then run down your savings until you die at 82.

While you are saving, and during retirement, the numbers assume your investments earn 3 per cent a year, after tax and inflation.

The numbers in the table are just one version of the truth - you'll get different answers if you use different assumptions.

Whether the figures are pessimistic or optimistic, only time will tell. But they suggest that, for many people, saving enough to provide anything like a middle class income is likely to be an uphill battle.

And they also show that it pays to start early - leave it until late in life and the weekly savings needed soon become astronomical.

* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. Email Mark Fryer Ph: (09) 373-6400, ext 8833. Fax: (09) 373-6423.