Your lifetime earning capacity: how knowing your ‘number’ will change the way you think about your finances

The amount of money you’ll earn in your lifetime is finite, and knowing what that total figure is likely to be will help you to think differently about saving, writes Lifetime financial adviser Emily Wheatley.

OPINION: Have you ever stopped to consider just how much you will earn during your working life?  

If you have a few minutes it really is quite useful to do - even if you’re not a number cruncher. All you need is your current gross annual income and how long a period you plan to stay in the workforce.

From there, it’s quite easy: simply multiply these numbers together.

According to Statistics New Zealand, the country’s average household income is just over $98,000 per annum. Using this annual earning income as an example, together with a remaining working period of 30 years without any breaks or change in hours, the average household will earn over $2,940,000 for the rest of their lifetime.

That’s right, our humble $98,000 per annum is catapulted into a total of $2,940,000 - which does not account for any increase in income from pay rises or inflation. With a three per cent pay rise included, this would skyrocket to $4,662,391.

If you wish to play around with the numbers, click here for an easy web calculator.

There are two ways to take stock of this enormous number. The first is to think from the point of view of “what can I accomplish with it?”. With a massive number like this you should be comfortably rich, right?

Not necessarily. The magic formula for getting ahead financially involves more then just what you earn; it requires savvy saving and investing as well.

Income – Expenses = Savings?

If only it was that easy. In 2017 Mastercard surveyed 407 people between the ages of 18 and 64 about their financial plans and habits. The survey found that Kiwis are saving at an average rate of 15 per cent of their income.

However, this 15 per cent included a range of savings goals such as travel (33 per cent) and home renovations (36 per cent), which is really just delayed spending.

Only 40 per cent of these savings was purely for retirement savings, making the real number that will help to get you financially ahead a lot less than 15 per cent. This is in line with the average retirement savings for men at $203,000 and $144,000 for women when they reach age 65.

Not exactly that golden nest egg many imagine settling down with.

When looking at expenses, there are certain costs we can’t change such as what we pay in Income Tax and ACC levies. This reduces the average New Zealand household on $98,000 by 15 to 20 per cent, leaving us with control over the remaining 75 to 82 per cent.

For the average household, the other main expenses consist of consumer debt including mortgage and credit card payments, and lifestyle expenses. These range from your basic utilities, fuel, and entertainment costs for you and your family.

To take control of your money, a good starting point is to establish a baseline of where your spending is occurring. Once you understand exactly where your money is going, you can then make an informed decision about where you really want these funds to go.

The truth is you do have control over your spending but must take ownership and plan if you wish to retire comfortably.

Instead of taking control, many people wait - they push the stress of taking control of their money to the back of their minds, and they don’t bother to open their bank or KiwiSaver statements. By doing so, they will find that that any change in their financial circumstances, such as job loss, inability to work or simply reaching retirement will result in them being completely uprepared.

Which brings me back to the second part of that whopping $4,662,391 number...

Is your ‘number’ worth protecting?

Nobody likes to add an expense to what they are already spending, but this one cost that is totally worthwhile. If your income is solely from your ability or capacity to work, then your ‘number’ is always in jeopardy.

Your capacity to work isn’t a given; it can be compromised and as we get older one realises that your body is not as invinsible as it once was. With income protection cover, however, you can transfer the risk of being unable to work due to sickness or injury to the insurance provider. And yes, you pay a premium for this.

But it’s totally worth it should the unforseeable happen. How much you pay will depend on many factors and getting the right advice from a trusted adviser is essential.

Now that you have had time to hopefully marvel at your own ‘number’, you can take steps to ensure that your lifetime income is protected and also directed where you want it to go. In doing so, if you’re unable to work or retire, you will be a lot better equipped to lever the change.

Article by Emily Wheatley - Meet Emily

Emily Wheatley is a financial adviser with the Lifetime group. She has over 10 years’ experience in financial planning and lives in Timaru.