How much money do you really need to retire?

Retirement – it's that magical phase of life when you finally get to live on your own terms. But how much money do you really need to retire comfortably in New Zealand? It's a question many Kiwis grapple with, and the answer isn't always straightforward. However, with the right planning and insight, you can carve out a future that's financially secure and filled with possibilities. Let’s break it down and make the path to your golden years a little clearer.

Retirement Lifestyles: Comfortable, Choices, and Luxury

First, let’s talk about the three primary retirement lifestyles we plan for at Lifetime:

1. Comfortable: Covering the basics and some treats.
2. Choices: Enjoying a range of leisure activities and some luxuries.
3. Luxury: Living the high life with ample discretionary spending.

Understanding which lifestyle you aspire to will help you plan more effectively.

Retirement Expenditure Guidelines

Let’s take a closer look at what retirees in New Zealand typically spend:

Source: New Zealand Retirement Expenditure Guidelines, Annual Update 2023 - Massey University and the New Zealand Financial Education Centre

Weekly NZ Super Rates

• $519.47 - One-Person Household
• $799.18 - Two-Person Household (Joint)

Example: One-Person Household Living In A Metropolitan Area

The gap between what NZ Superannuation provides and what you actually need can be significant. For instance, a one-person household in a metropolitan area with a Comfortable lifestyle requires an additional $306.79 per week beyond NZ Super, equating to nearly $400,000 over a 25 year retirement.

Important note: We have used some blunt calculations for the case of this educational article. In a full financial plan we would of course take into consideration important factors, such as inflation, net present value adjustments, and the interest earned on investment balances after retirement – after all, we don’t tend to withdraw and spend all the money bang on age 65. 

Key Components Of Retirement Income

KiwiSaver: Your Retirement Nest Egg

KiwiSaver is a cornerstone of retirement planning in New Zealand. This voluntary, work-based savings initiative is designed to help New Zealanders save for retirement with contributions from both employees and employers, supplemented by government incentives like annual tax credits. The magic of KiwiSaver lies in the power of compounding interest, making early and consistent contributions incredibly valuable.

Starting early can make a significant difference. If you begin contributing at age 25, the amount you need to save weekly is considerably lower than if you start at age 50. For example, to achieve a balance of $400,000 by age 65, a 25-year-old needs to save about $60 per week, while a 50-year-old needs to save $342 per week. This illustrates the substantial benefits of starting your savings journey as early as possible.

NZ Superannuation: The Foundation

NZ Super provides a reliable income base for retirees. While NZ Super covers some of the basics, it's often not enough to sustain a comfortable lifestyle on its own. This is why additional savings through KiwiSaver and other investments are crucial. Relying solely on NZ Super can be risky due to its limitations. Although it provides a dependable income stream, it is designed to cover only the basics. 

Moreover, while it is unlikely, there is a potential risk that NZ Super could be discontinued or significantly reduced in the future due to economic or political changes. Depending solely on NZ Super without additional savings puts retirees at the mercy of these uncertainties. Building a robust retirement plan with diverse income streams ensures financial security even if NZ Super were to change.

Savings & Investments: The Game Changer

Beyond KiwiSaver and NZ Super, having additional savings and investments can significantly enhance your retirement lifestyle. Diversifying the asset mix in your retirement portfolio through can provide additional financial security and flexibility.

Investments can act as a buffer against inflation and economic fluctuations, ensuring that your purchasing power remains strong throughout retirement. They also offer the potential for growth, helping to cover unexpected expenses or enabling a more luxurious retirement lifestyle.

In summary, a robust retirement plan typically includes a mix of KiwiSaver, NZ Super, and other savings and investments. By starting early, contributing consistently, and diversifying your investment portfolio, you can build a secure and comfortable retirement. Remember, the key is to take action now, plan wisely, and make informed decisions that will benefit you in the long run.

The Impact of Housing

Mortgage-Free vs. Renting or Owing Debt

Housing costs play a pivotal role in retirement planning. Owning a mortgage-free home can significantly reduce your expenses, providing financial stability and peace of mind. On the other hand, if you're still paying off a mortgage or renting, you need to account for these ongoing costs in your retirement budget.

Case Study: Bridging the Retirement Gap for Ali and Alex

Let’s consider Ali and Alex, a couple aged 50, with a small mortgage and minimal savings. They are keen to retire comfortably, but their current financial situation poses some challenges. We'll explore their situation, highlight the shortfall, and demonstrate how some simple planning can help them cover that gap entirely.

Current Situation

• Age: 50
• Mortgage: $50,000 remaining, with 5 years left
• Mortgage Payments: $1,000 per month
• Savings: None beyond KiwiSaver
• KiwiSaver Balance: $35,000 each, both in Conservative funds
• NZ Super: They will receive $799.18 per week after tax as a couple

Retirement Goals

• Lifestyle: Comfortable, with occasional travel and dining out.
• Weekly Budget: $982.02 (Comfortable budget for a couple in a metro area).

Analysis: Identifying the Shortfall

Ali and Alex’s NZ Super provides $799.18 per week, but their target is $982.02. Their KiwiSaver’s are projected to grow to $38,740 each, a combined value of $77,480. Even with that, they still face a shortfall of $160,217 over a typical 25-year retirement.

Given their current financial situation, they face a significant gap. However, they can take steps to bridge this gap and even create a surplus by the time they retire.

Strategy: Paying Off the Mortgage and Investing

Step 1: Paying Off the Mortgage

Ali and Alex will continue to pay $1,000 per month towards their mortgage, which will be paid off in 5 years when they are 55.

Step 2: Investing Mortgage Payments

Once the mortgage is paid off, they will redirect their previous mortgage payments into an investment account. From age 55 to 65, they will invest $1,000 per month. Assuming an annual return of 5%, by the time they are 65, Ali and Alex will have approximately $155,929 in their investment account.

Step 3: KiwiSaver Growth

After completing a risk profiling assessment, both Ali and Alex were comfortable and capable of taking on a bit more risk with their KiwiSavers. Moving to a Growth fund, they could then anticipate their KiwiSaver balances of $35,000, with no additional contributions, growing to $53,067 each at age 65.
Result: Combined Retirement Funds

At age 65, Ali and Alex’s total retirement funds will be:

• Investment Account: $155,929
• KiwiSaver Accounts: $106,134
• Total Savings: $262,063

Covering the Shortfall

Ali and Alex needed an additional $160,217 to cover their retirement shortfall. Their combined savings of $262,063 will not only cover this shortfall but also provide a surplus of $101,846.

Conclusion: The Power of Strategic Planning

Ali and Alex’s case illustrates the importance of strategic financial planning. Even with a late start and existing debt, it’s possible to make significant strides towards a comfortable retirement. By paying off their mortgage early and investing wisely, they have not only eliminated their financial shortfall but also created a surplus, ensuring a secure and comfortable retirement.

How to Bridge the Gap

Bridging the gap between your current financial situation and your retirement goals requires a strategic approach. There are many tools and strategies at your disposal to help you achieve financial security. Here are some key examples:

KiwiSaver Strategy

Maximising KiwiSaver is a fantastic way to build your nest egg. Ensuring you contribute at least the minimum for the government’s annual tax credit, considering your contribution rates, and reviewing your risk profile are all important factors. As are performance, fees, and strategies to ensure the fund aligns with your goals.

Mortgage Structure

Managing your mortgage effectively can free up funds for retirement savings. Consider making fortnightly payments instead of monthly ones, or making extra payments to reduce the principal faster. Locking in a low fixed interest rate can provide stability and lower repayments, freeing up more money for investments.

Investment Planning

You don't have to wait until you're debt-free to start investing. Compound interest can significantly boost your savings. The earlier you start, the more your money grows. Even small, regular contributions add up. 

Seek Professional Advice

Personalised financial advice can make a significant difference. A financial adviser can help tailor a plan to your unique circumstances and goals. Regular reviews with your adviser ensure your plan stays on track and adapts to any changes in your life or financial situation.

Just Start

The key is to start, no matter how small. Building a habit of saving and investing will pay off. Track your income and expenses to identify savings opportunities. Set up automatic transfers to savings or investment accounts to ensure consistency. Define your retirement goals, create a plan, and regularly review and adjust it.

Final Thoughts: Your Retirement, Your Way

Retirement is a significant life transition, but with thoughtful planning and a clear understanding of your needs and resources, it can be the most rewarding phase of your life. Whether you’re aiming for a Comfortable, Choices, or Luxury lifestyle, with our comprehensive financial advice, you can confidently plan for a future that’s as bright and secure as you envision. 
Let’s make your golden years truly shine.

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.