Chances are, you’re not putting enough money aside for the retirement you want.
A recent Retirement Commission paper noted that while the KiwiSaver scheme had seen many more people saving for their retirement, there was still room for improvement.
The Commission’s policy lead, Michelle Reyers, told Breakfast last week it was still early days as to whether KiwiSaver would mean people save the money they needed for retirement.
“[But] there are concerns at the moment that people are entering retirement with insufficient funds to maintain their standard of living,” she said.
So, how much money do you need to live comfortably in your older years?
Calculating your comfort
It is, of course, quite tricky to put a total dollar amount on how much money someone might need in retirement – and how much more they might need to save to reach that target.
This is because people’s lives can be very different – where they lived, who they lived with, whether they owned their home could affect the equation. People could also have different ideas about how extravagantly they wanted to live in their later years.
However, there were a couple of ways people could calculate what their retirement plans would cost, Sorted Personal Finance Lead Tom Hartmann told 1News.
As both Hartmann and the Retirement Commission paper pointed out, financial planning practice often cited 70% as a benchmark for replacing pre-retirement earnings.
That would mean, for example, if you were earning $100,000 annually before retirement, you would aim to have $70,000 a year in retirement income. That amount was based on the assumption retirees typically needed less income.
In countries like the US, that meant people needed to save between 10 to 15% of their income to meet that 70% rate.
Minding the gap
However, the Retirement Commission said the presence of NZ Superannuation implied New Zealanders would not have to meet that same 10-15% savings goal to achieve the same 70% replacement rate.
The NZ Super payment that kicked in for everyone at 65 was an important consideration in calculating retirement savings, Hartmann said.
“The main thing that everyone needs to know is that we have New Zealand Superannuation, which is actually a floor,” he said.
“So, the question for everyone is how much above what superannuation provides do we need to have in retirement.
“People have different goals and some people’s goals will be much higher than [what NZ Super provides], but NZ Super allows us to plan for that amount on top of that. That’s what we call minding the gap – the gap between what NZ Super provides and how much we think we’ll need for a comfortable retirement.”
Hartmann said there were some key questions people needed to ask themselves when they were calculating how much money they would need in retirement.
“One is how long do we think retirement will be; how many years of retirement are we planning for,” he said.
“Most people end up spending their retirement funds in the early years of retirement, so maybe in the first 10 to 15 years and then after that the expenses go way down and they end up relying on superannuation, so that’s one way to plan for it.”
People also needed to consider if they would still be renting or still have a mortgage to pay past the age of 65.
Sorted, which is a government-funded, independent agency, has a few financial tools on its website, including a retirement calculator that helps people see how they were tracking in their retirement savings goals.
The tool calculates what you would get from NZ Superannuation each week and what you would likely have from your KiwiSaver fund by the time you retire. It then it estimates if you’re facing a shortfall in money for the lifestyle you want to lead in retirement – be that a no frills existence or one that allows some choices.
What if you’re facing a shortfall?
There were a few ways to try and boost your retirement savings.
Hartmann said it’s never too early to start saving for retirement, so if you’re still a young person, you could use time, or more specifically compound interest, to your advantage.
Compound interest means you earn interest on the amount of money you have saved in a fund as well as on the interest that is added to it over time. That compounding effect could significantly increase your retirement savings.
“If someone is adding to their KiwiSaver for 40 or 50 years, we project that the lion’s share of the [money] you end up with when you retire is mostly going to come from returns from the market,” Hartmann said.
But if age and time were not on our side, Hartmann said people could look at other adjustments to their KiwiSaver.
“Our KiwiSaver calculator is one way of seeing how much of a difference it’s going to make to you in retirement by pulling the levers that are there,” he said.
How much a person contributed to their KiwiSaver was one of those levers, as was the type of fund they were in.
“For example, if it’s appropriate and there’s enough time [before you reach retirement age], you might find that moving into a different type of fund with more risk in it will help make up some of the difference,” Hartmann said.
“Not all KiwiSaver funds are the same, and so for example it could be that moving to a fund with much lower fees can very much affect your final result.
“We always tell people to take professional advice on this, but there are certain things that we can do in order to get more money growing.”
Beyond KiwiSaver
Different people would have other ways of ensuring they had enough money to live a comfortable retirement, Hartmann said.
“People continue to work, even part-time or casually, in retirement to supplement their income,” he said.
Others used strategies like downsizing their larger family home or subdividing property.
“[Some] are also selling their home to family while maintaining the right to live in it, so they’re staying at home but are effectively selling off their equity.”
Then, there was the cohort of New Zealanders who depended on government benefits and would find that superannuation actually lifted their income when they hit 65.
“Obviously, that’s entirely appropriate,” Hartmann said.
“[NZ Superannuation] is designed to do a couple of things – it treats all people over the age of 65 equally, but it also takes care of that risk that you might run out of money because you live longer than you think.
“NZ Super takes care of that so nobody in retirement should run out of money.”
