It’s getting pretty close to BBQ season which is one of the best times for me. Sitting outside with friends, reflecting on the year that has been and then chatting about what the possibilities are for the new year, is always something I look forward to. Given I’ve been in financial services for 40 years the question almost always comes up around what we might do in our retirement years: my mates want me to bring out a crystal ball and tell them how much they need to save to enjoy a happy retirement.
My answer over the years has been pretty much the same: “Well that’s easy, the formula looks a little like this:
“If A = the years between the date you retire and the date you die and B = the things you want to do and your cost of living, then B divided by A = C, what you need a year to live on. Pretty simple really.”
The trouble is it’s not. Life is not linear and it is something that comes to mind more and more as we head towards our non-working years.
Retirement is a word that only recently entered the dictionary of life: it came into some level of prominence in the late 18th and early 19th century. But in New Zealand it wasn’t until 1938 that it really became relevant. That’s when some major welfare reforms took place and a national pension, of sorts, was provided that allowed Kiwis to stop work. Before then you basically worked until you died, unless you were born into a certain level of privilege.
My parents calculated the first part of the above formula ‘A’ as three score years and ten. In their world, that was their life expectancy which is another way to say 70.
My mum and dad were careful with money, based on their experiences as children growing up through the Second World War and hearing what their parents had to live through in the depression, scarcity what real and their reality.
They worked hard and were incredibly generous to their family, so when they reached retirement they had a freehold home, some savings in the bank, and their National Super. They had planned a once in a lifetime trip overseas, which they did, and then pretty much lived life out with family and friends and their hobbies. Their reality for ‘A’ was actually 88 for dad and 95 for mum. So quite a significant gap from their expected life span, to what was their eventual outcome.
If we look at Stats NZ data to 2019, the average life expectancy for females was 83.5 and males 80 years of age. The thing with averages is that they really don’t work in reality because if you get to the age of 60 for example the chances of you living a lot longer is much higher.
The next part of the formula ‘B’ is actually where the rubber hits the road. It needs careful consideration and even then some on the list below is really just a best guess.
When I was at the Retirement Commission, as part of the 2016 Review of Retirement Income Policies, we found that around 40% of Kiwis were working between the age of 65 to 69, either full or part time. This means, of course, they do not have to dip into their savings, either via KiwiSaver or other investments, and can have their savings working harder for them until they actually need them.
With those two elements worked out, then the answer = “C”. Remember, most of us will get National Superannuation at the age of 65. Looking at the Sorted website, if you have M as your tax code then, for a single person living alone, you would get after tax $463 a week or $24,073 a year. For a couple, who both qualify, the number is $712 a week or $37,035 a year in the hand.
For some that is a good start to take the weight off the daily cost of living. However, this is on the premise that everyone who retires is pretty much debt-free and owns their own home. The reality is that’s not always the case and the number of non-homeowners is increasing every year.
Massy University Fin Ed Centre updated their guidelines for New Zealand Retirement Expenditure in June of this year and stated what the costs would be for those living alone and couples on a no frills or choices budget. It is well worth reading and the costs look something like this:
One person household metro (those that live in the larger cities):
Two people household metro:
Clearly this leaves a little bit of a gap, but does help build a foundation for planning ahead. The trouble is most of us don’t do that. The worst thing anyone can do is leave the planning to the very end of their working career. I know happiness in retirement is not solely about how much money or assets you have – there are plenty of people who have a truckload of property and investments etc but are not that happy. What a plan does is give you choices and help improve your overall financial wellbeing.
If you are serious about wanting to land in a good place, or at least have some idea where you might be based on today’s choices, then these are the ingredients that you need to put in the pot to help your future self:
Invest some time and money with a financial adviser, they can give you a holistic view of your possible future and help with either managing your expectations or finding ways to change your financial activity now to help you get there sooner
Think of the above as a number of different levers that you can pull up or down now to help you get a better picture of what your outcomes could be in the future.
So, what’s your number?
Disclaimer: David Boyle is Head of Sales and Marketing at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice.
Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement.
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