Finance: Every cent put away now helps later

Government superannuation - will you get it at age 65, or indeed, at all?

We can draw fairly obvious conclusions from the Government's finances, and New Zealand's ageing population demographics. We can also look at other countries where the entry age has been raised, such as France, which resulted in protests and riots.

Politicians don't want to lose your vote, so they are likely to phase in increases in age and payment reductions very slowly.

It would be a fair bet that anyone 55 or over today will be unaffected - they have to give people fair warning of changes, and time to adjust their plans.

It is also a fair bet that people aged 45 to 55 today will see the retirement age gradually increased to 66 then 67 and so on.

People under 45 are likely to hear about the age being increased to 70 and means testing being brought in. This age group need to lobby their MPs fiercely for more tax incentives to save.

This article assumes:

• 
  you will get government super in full
• 
  your investment funds will run out after 30 years of retirement
• 
  you will get investment returns of 5 per cent a year after tax*

*To get this return, you will probably need to invest in a conservative to balanced portfolio of bonds, property and shares. To keep risk to a minimum, any investments also need to be well diversified on and offshore.

Cash flow is king before and after retirement

We all need cash flow during our working lives to feed ourselves, and we all know how this works - wages and salaries and so on.

We all need cash flow after we retire but we don't know how this works until we retire.

The main retirement cash for most retired Kiwis comes from government super;

• 
  about $28,000 a year net for a couple aged 65 or over
• 
  about $19,000 a year for a single person living alone

A bit skinny for most of us!

How much income do we need in retirement?

• 
  Single retiree, basic living: $19,000 (Government super), $25,000 (income needed), $6000 (shortfall)
• 
  Couple, basic living: $28,000, $35,000, $7000
• 
  Single retiree, comfortable living: $19,000, $35,000, $16,000
• 
  Couple, comfortable living: $28,000, $45,000, $17,000

We will need some savings, too

To get the extra income, we will need investments and allow for inflation.

• 
  Single retiree, basic living: $133,000 (investment needed), 5 per cent (return needed after tax and fees), $6000* (shortfall made up)
• 
  Couple, basic living: $156,000, 5 per cent, $7000*
• 
  Single retiree, comfortable living: $355,000, 5 per cent, $16,000*
• 
  Couple, comfortable living: $380,000, 5 per cent, $17,000*

* increasing annually at 3 per cent for inflation and funds exhausted after 30 years.

Still not enough

In retirement, people withdraw lump sums from investments for many reasons:

• 
  $40,000 to upgrade the car two to three times
• 
  $10,000 for a new roof
• 
  $3000 per eye for cataracts
• 
  $18,000 to $25,000 for a new hip or knee
• 
  $10,000 or more for family member in distress
• 
  $10,000 to $50,000 in loans to children that don't come back
• 
  $20,000 to upgrade kitchen
• 
  $10,000 for a new carpet
• 
  $20,000 to alter house to allow for less mobility

You won't incur all of these, but you will incur some, so your savings may need to look more like this;

• 
  Single retiree, basic living: $170,000 (investment needed), 5 per cent (net return needed annually), $6000* (shortfall made up annually)
• 
  Couple, basic living: $190,000, 5 per cent, $7000*
• 
  Single retiree, comfortable living: $425,000, 5 per cent, $16,000*
• 
  Couple, comfortable living: $450,000, 5 per cent, $17,000*

* Funds all used up after 30 years in retirement.

Any saving is good saving

A couple aged 50 have kids largely off their hands, the mortgage largely under control and have surplus income.

They start saving $1500 a month invested in a balanced portfolio earning 6 per cent after tax and fees.

By age 65, total input $270,000, savings grow to $446,106.

This article was supplied by Alan Clarke, author of Retire Richer - A Practical Guide For Everyone Aged 25 to 85. Clarke also blogs on www.investandretire.co.nz and is an authorised financial adviser whose disclosure statement is available on request and free of charge.