A day will finally come when you clock out of work for the last time and never return.
If you’re smart, you would have spent the last several decades preparing for the arrival of this day.
But for many Kiwis, this is far from the case.
According to the Commission for Financial Capability’s report of New Zealanders aged 50+, of those yet to retire…
- 46% do not have a financial plan for retirement.
- 55% have not calculated likely expenses in retirement.
- 60% had not calculated how much they needed to live the lifestyle they want.
- 47% did not have enough savings/investments to deliver the lifestyle they want.
This lack of planning could be one of the factors in the current shortfall that many Kiwis over 65 face.
A recent report by The Financial Services Council says that these Kiwis currently experience an average shortfall of $218 per week in post-retirement income to live comfortably. Nearly all of them are relying fully on NZ Super after just 10 years into retirement.
If you do not have a retirement plan in place, now is your chance to rectify this mistake.
By following these five easy steps below, you will be well-placed to fund your retirement.
Step one: Decide when you would like to retire
When Kiwis think of retirement age, the default answer seems to be 65 — the age which NZ Super kicks in.
But 65 is in no way set in stone. Many people wish to work beyond 65, and others would prefer to retire earlier. The choice is up to the individual.
But, be realistic. It’s worthwhile developing a retirement plan in case you retire earlier than you expect. Health reasons could force you out of employment early. Or you might be laid off and find it difficult to secure employment later in life.
Once you have a tentative retirement age in mind, it’s time to move on to step two.
Step two: Consider how long your retirement will be
People are living much longer these days, and the possibility of running out of funds too early is very real.
This calculator from Stats NZ will give you an indication of your life expectancy. And just to be on the safe side, it wouldn’t hurt to add some buffer by inflating this age.
You may find that you need your retirement savings to potentially last multiple decades, so factor this into your retirement plan.
Step three: Estimate your expenses in retirement
So, this is where it gets a little tricky.
There’s no perfect method for calculating your retirement expenses.
Some of your current expenses will decrease when you retire (commuting and other work-related expenses).
Some costs might increase in retirement, such as healthcare.
It’s also important to envisage the kind of lifestyle you want. Do you want to indulge in expensive hobbies and travel? Will you frequently dine out, or will you eat at home more since you will have more time to cook?
These are some of the questions to ask yourself.
Inflation is another thing to take into account. Years down the track, things will be more expensive than they are today.
Keeping all these factors in mind, take your current annual expenses figure and adjust as you see fit. This will never be a perfect figure, just a rough estimate. [openx slug=inpost]
Step four: Work out how much you will need to have saved
Now that you have estimated the number of years you will be retired, and your annual expenses while retired, you will have an idea of how much money you will need saved.
One thing to consider is whether you plan to use up all your savings during retirement, or whether you want to live partially or fully off investment returns, keeping your savings largely intact to eventually pass down to your family or for other purposes.
Another point is whether to include NZ Super into your calculations, given that it may or may not exist in its current form by the time you turn 65.
Sorted provides a good calculator here, which assumes you will use up all your savings and you will receive NZ Super from 65.
If you would rather live off the returns from your investment portfolio, a good rule of thumb is to save 25x your yearly expenses. This would allow you to withdraw 4% of your portfolio each year, which is considered a ‘safe’ withdrawal rate.
Step five: Plan how to reach your savings goal
You might be looking at the figure you calculated and thinking how on earth will you manage to save up that much money?
The good news is that just about everyone has the ability to save a large sum.
The catch? You need to start young.
With the power of compounding interest, even a modest investment can become $1 million or more over a long period of time.
Check out this handy savings calculator at Sorted.org.nz to work out how much you will need to save per week to reach your savings goal.
But what if you are starting late?
Don’t panic. All is not lost.
There are a few things you can do.
- Save aggressively — Increase your savings rate as much as you can by cutting back wherever possible.
- Increase your earnings — Their 40s and 50s is often when people see their highest earning potential. Asking for a raise, applying for another role, or starting additional employment are all options.
- Consider pushing out the date you wish to retire or working part-time when you are older.
- Tune up your portfolio – consider your mix of investments…and the potential risk and return that they currently offer. If that doesn’t meet your financial expectations for retirement, it might be time to tweak it.
To recap, these five basic steps will put you on track to save for retirement:
- Choose the age you would like to retire.
- Work out how many years your retirement could last.
- Estimate your expenses during retirement.
- Calculate how much money you will need to have saved.
- Plan how to reach your savings goal.
With a retirement plan in place, you can rest easy.
Just make sure to stay on top of your weekly savings goal and review your plan on a regular basis, and the retirement you dream of will be within reach.
Contributor, Money Morning New Zealand