How much money do I really need to retire

30 September 2019

What’s the magic figure you need for a wonderful retirement? Like everything in finance, the answer is 'It Depends'.

 

How much you need to retire depends on your own personal circumstances and what you expect out of your retirement. It also will depend on when you plan on retiring and whether you choose to keep working for a reduced number of hours or not in the initial years after you turn 65. But, you already knew that. So, before you think we got you here on false pretences, we do have a real answer.

The answer is not an actual figure but a framework and a way of thinking about your retirement. What is important to remember is that in assessing how much you need, you shouldn't get wowed by big savings numbers. Figures that KiwiSaver calculators show you, like $500,000 or $825,000 may seem like a lot right now but what you always need to focus on is the weekly income, making sure it’s been adjusted for inflation.

Your weekly income is what your spending power will be when you hit 65 and is the easiest thing to compare to your current spending power (defined by your current income).

 

What the research says

International research is consistent in stating that you need at least 70% of your pre-tax income after you retire for you to have a comfortable retirement. This is assuming you already own a house and have paid off the mortgage on your home. For the current generation of renters, many of whom don't ever plan on getting a mortgage or are unable to afford one, research suggests that your savings should then give you 100% of your current income in retirement too.  In practice, that means if you currently earn an annual income of $80,000 per annum, you will currently have a take-home income of $1,159 after tax and KiwiSaver contributions. To be comfortable in retirement, you will need an income of $811 - $1,159. 

Saving 100% of your pre-retirement income may sound high, especially if you don’t have kids’ or mortgage payments to worry about. Still, research shows many people end up spending more than their current income when they enter retirement as they have more time and therefore look to spend more money on leisure activities. Aiming to save 100% of your income allows you that financial flexibility to take up the things you love doing.

Here in New Zealand, Massey University conducts an annual study to estimate how much people need for their retirement. The amounts vary based on the household situation, where you live, and the quality of retirement you want to live. Nevertheless, the table below will give you a useful picture of how much you need to live a comfortable retirement.

New Zealand Retirement Expenditure Guidelines

  1 person household 2 person household
  Metro Provincial Metro Provincial
No frills budget $598 $569 $885 $630
Choices budget $1,190 $834 $1,418 $1,118

Source: Massey University. Figures mentioned are weekly income/household.

 

But more importantly, what do you want in retirement?

While international and domestic research provides a good benchmark, a benchmark is pretty generic; we think it is always useful to create a budget taking into account the life that you want to live in your retirement.  You may want to go on a cruise every year, or you may want to turn a hobby into a part-time gig to keep the income flowing, or you may want to leave the big city and put your feet up surrounded by nature.

A simple exercise you can do to figure out your figure is to work out the below:

  • What are your current household expenses?
  • What expenses will you no longer have when you enter retirement (kids, mortgage payments, car repayments and other such big-ticket items)
  • What are the additional things you would like to do in retirement and how much are they likely to cost?
  • Add these up and then add a 10 - 20 % buffer to provide for the unexpected costs that will inevitably crop up like your house requiring maintenance.
  • Use the kōura advice tool to see whether you are on track for a comfortable retirement.
  • Revisit these figures annually to ensure you're tracking well against your goals

 

But we get NZ Super. Why worry?

Us Kiwis are very lucky to have NZ Superannuation (also known as NZ Super). NZ Super is the government pension paid to Kiwis over the age of 65. It's a great provision because any New Zealander that has lived in NZ for over 10 years can receive NZ Super and this figure is not income tested which means you receive it regardless of what your income or assets are.

As of April 1, 2019, NZ Super rates were $411 per week (after tax) for a person living alone, falling to $316 per person for a married couple. There is significant debate about whether NZ Super will remain in place and be available to everyone.  We are one of the only countries in the world to have universal Superannuation scheme. A recent report by the Interim Retirement Commissioner says that New Zealand doesn't need to increase the age of eligibility for New Zealand Superannuation and can afford to keep it at 65 for at least the next 30 years. However, there is a significant chance that NZ Super becomes means-tested (i.e. will depend on your income or assets) in the future or that the authorities that change their mind about the eligibility age altogether yet again. 

In figuring out your retirement pot, we suggest you think about a downside scenario where you may not end up not qualifying to receive the full amount.

 

What does this mean for my retirement pot?

While it's great to see the money you will need every week, you need to understand how to translate that into a KiwiSaver balance. The core assumption make is that you will slowly draw down on your savings to provide you with your weekly income, and your NZ Super will supplement that. Life expectancies are growing every year, and so our calculators assume you will live to 90

Set out below then is an example of Ben and Rachel and how we can translate their current income into a KiwiSaver savings goal:

KiwiSaver Savings Goal Indication Ben Rachel
Current pre-tax income $80,000/year $150,000/year
Current weekly income (after tax & KiwiSaver deductions) $1,159/week $1,774/week
KiwiSaver balance required to deliver equivalent income (inc NZ Super) $1.4million $2.8million
Employee contribution rate required to deliver KiwiSaver balance 10.4%
11.4%

 

Most people are currently only contributing 3% of their salary to their KiwiSaver account as this is the amount that's matched by their employer. Unfortunately, this is not going to give people anywhere near enough to fund the retirement they are expecting!

If Ben and Rachel above started their KiwiSavers at the age of 30 (after buying their own home), Ben would only have $592k in his account and Rachel would have $1.1m. This is significantly smaller than the $1.4m or $2.8m that they would need to retire with a similar income.

Sure, your mortgage-free home is an important financial asset that can be used to fund your retirement, but you need to remember that if you sell your house, your ongoing living costs will increase as you now have to pay rent! The better option would be to downsize to a smaller home, thereby releasing some equity. Though, with the rate housing prices are increasing in New Zealand, you may not get as much bang for your buck!

The ideal option for Ben and Rachel would be to increase their KiwiSaver contributions. To reach the 70% rate, they will need to contribute between 10-12% of their incomes into their individual KiwiSaver accounts.

 

Conclusion

Ultimately, your own retirement requirements will depend on your own personal circumstances. Think hard about the sources of income you may have at retirements like part-time income, NZ Super and your KiwiSaver fund but think harder about your future expenses taking into account possibilities like having to support older or younger dependants in some ways, higher healthcare costs and the possibility of redundancy.

 

Right KiwiSaver Plan (2)

 

 

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