By David Chaston
How do you know if you are saving enough to have decent financial capacity for a reasonable retirement?
It is not an easy question to answer, and waking up to a shortfall when you are in your mid 50s may well be too late.
So we need life-stage markers to ensure we aren't caught short.
Retiring in penury is an outcome best avoided. Actively.
As you would expect, there are many ways to look at this.
First is to know that in retirement you will likely need about 80% of your pre-retirement income if you wish to maintain a similar but more modest living standard.
So, your expected annual salary at aged 65, less NZ Super of about $17,000 each if you are married (details are here), is the income off of your investments that you will need.
If you work this out, you will quickly see the current capital value of a regular income.
Here's an example, assuming you are male and earning the median income for a 64 year old. That, according to Stats NZ (LEEDS) is about $62,630 per year. If you are female and earning the median income for a 64 year old, that is $42,370 per year, and that highlights the extremity of the disadvantage and inequity for women.
So the numbers pan out like this:
| 2018 dollars, pre-tax | Single Male | Single Female | Couple male working |
Couple both working |
| $ | $ | $ | $ | |
| Income pre retirement | 62,630 | 42,370 | 62,630 | 105,000 |
| Target retirement income (80%) | 50,100 | 33,900 | 50,100 | 84,000 |
| - from NZ Super | 23,400 | 23,400 | 35,440 | 35,440 |
| - needed from investments | 26,700 | 10,500 | 14,660 | 48,560 |
| That will require either an investment of a ... | ||||
| Term deposit, returning 3% gross | 890,000 | 350,000 | 488,700 | 1,618,700 |
| or ... | ||||
| KiwiSaver returning 5% gross | 534,000 | 210,000 | 293,200 | 971,200 |
Two points to make up front: If you own a house, you can't 'eat' it. It's value will only be realised if you sell it. Then you have to rent.
And secondly, for the above table to be valid you will need to have faith NZ Super will still be available as it is now, when you retire.
The lower your income, the less likely you will have the ability to save the investment you will need. And the above data is eye-catching because in a low-interest-rate world the invested fund level you will need is very high.
If interest rates rise, fund returns will also likely rise. But the sting may well be that these benchmarks are rising because inflation is rising. And inflation will reduce the purchasing power of whatever you earn. How you can live today with a $50,000 pa income will be greatly different and tough if meaningful inflation returns, - (5% inflation will hurt retirees a lot).
So you need to start soon.
The above table shows how many times your salary you will need to have saved as a minimum. Here it is again focused on how many years of income you need to have salted away.
| 2018 dollars, pre-tax | Single Male | Single Female | Couple, male working |
Couple, both working |
| $ | $ | $ | $ | |
| Income pre retirement | 62,630 | 42,370 | 62,630* | 105,000 |
| Requiring ... | ||||
| Term deposit, returning 3% gross | 890,000 | 350,000 | 488,700 | 1,618,700 |
| or ... | ||||
| KiwiSaver returning 5% gross | 534,000 | 210,000 | 293,200 | 971,200 |
| Requiring this many years of income ... | ||||
| Term deposit, returning 3% gross | 14.2 | 8.3 | 7.8 | 15.4 |
| or ... | ||||
| KiwiSaver returning 5% gross | 8.5 | 5.0 | 4.7 | 9.3 |
Depending on your circumstances, you will need between five and fifteen times your salary saved, and invested, to maintain a similar lifestyle in retirement.
It is a daunting prospect.
But you won't get there without a plan, personal financial discipline, and getting started.
If you save 10% of a lifetime income and invest that in growth assets, you may not make it. You will need to save more like 15% per year. Here is the maths again, based in part on Stats NZ LEEDs data and assuming you will retire in 2018. That won't be your scenario, but it might help you think about what a plan personalised for you might look like.
| pre tax | Avg Annual Income |
15% pa saved in 5 years |
5% earned after tax on savings |
Cumulated savings |
| $ | $ | $ | $ | |
| 20-24 | 11,300 | 8,480 | 420 | 8,900 |
| 25-29 | 29,500 | 22,130 | 1,550 | 32,580 |
| 30-34 | 32,500 | 24,380 | 2,850 | 59,810 |
| 35-39 | 35,500 | 26,630 | 4,320 | 90,760 |
| 40-44 | 37,300 | 27,980 | 5,940 | 124,680 |
| 45-49 | 43,500 | 32,630 | 7,870 | 165,180 |
| 50-54 | 49,700 | 37,280 | 10,120 | 212,580 |
| 55-59 | 56,500 | 42,380 | 12,750 | 267,710 |
| 60-64 | 61,100* | 45,830 | 15,680 | 329,220 |
| ----------- | ----------- | |||
| Totals | 267,720 | 61,500 |
* The $62,360 in the first table is the pre-retirement income in the final year of work, whereas the $61,100 in the table above is the average annual income over the five years from age 60 to 64.
Leverage can work for you. If you borrow to buy a house that will be much bigger than you will need in retirement (when you will downsize), then the principal repayment portion of your mortgage will count to your savings rate.
But the main take-away here is the size of the challenge. You need to save about 15% of your gross income per year if you are on a median income, and that will result in total savings of $329,220 at retirement, which when supplemented by NZ Super, will give you an annual income in retirement of a bit over $50,000 per year.
Observant readers will have noticed that this plan will not work if you save using term deposits. You need a growth vehicle like those available in KiwiSaver to reach this target. And that only works out on a long-term basis.
Of course, you can also decumulate. That is, you can use some of your previously saved capital to spend. That is a simple thing to do and with low investment returns it might seem like the immediate cost is low. But consuming your capital is risky at later life stages. You don't know your own life expectancy. And you don't know what age may throw up in terms of medical costs and living assistance.
Finally, you need to protect yourself from changing public policy positions. Younger people with debt (like student loans, for housing, etc.) will be pressing for higher inflation to devalue their debt obligations. Trendy 'social consciences' also like higher public spending including deficit spending, all virtual certainties to reignite inflation - and make NZ Super as we currently know it unsustainable quicker. And accounting for inflation is the toughest challenge when planning for retirement.
(You need to focus on what you need to do. Try to avoid thinking about the fact that the public purse will be available for those who either can't, or can't be bothered.)
You can check the returns of all KiwiSaver funds and their asset allocations, here.
69 Comments
Much simpler calculation (in today's dollars, after tax, no inflation and no risky investing):
1. you with your partner are in your 60s and you are going to retire now
2. you have house value 1mln (in Auckland) paid off
3. you are going to live until 85 so need to support two from 60 to 85
4. from 65 you will have 31200$ as pension
5. you have 100k saved in kiwisaver accounts
thus:
1. selling the house now and buying for 500k new one elsewhere releases 500k
2. you both need to spend 75k (after tax) yearly in first 5 years = 375k spent before you are 65
3. after 65 you both have 100k (ks) + 125k (from house) + 31.2k yearly (pension)
4. 225k needs to spread over 20 years = 11.25k yearly
5. you will have 31.2k+ 11.25k=42.45k (after tax) yearly from 65 to 85 for two.
How many whole families have less than that in their lives (820$ a week)...?!
All numbers above can be varied e.g. less spending at the beginning
or spending 15% of your capital yearly and decreasing 1% yearly, or cheaper house, etc.
Overall simple excel calculation.
Also,when you both die that remaining house is your inheritance for any family....
And when you retire at 60 you leave more "space" for younger generation....!
Yeah that often does not happen in real life.
1. You will be lucky
2. bwahaha yeah about that lifestyle in Kerikeri
3. Sorry bit of a stuffer about the human body and health costs
4. Not in future
5. Bloody likely living paycheck to paycheck
Thus:
Welcome to the real world. Ever wondered why we need so many state & council pensioner houses, health home care, hospice, company retirement schemes and the pension on top of everything. A person would be lucky still to own the home they die in. Many do not. In fact many die in retirement homes experiencing years of dementia, lack of funding for basics, often a health ailment they cannot afford to treat adequately. That is today, and has been the case for over 2 decades (almost the entire generation). We have declining affordability in the next generations with increased lack of medical care, financial resilience and job security. We have decreasing rates of home ownership and assistance services. Plus as an added bonus the pension will not even bother to keep up with cost of living increases and will have the ladder pulled up with each successive generation. The young now would be lucky to even have a pension (company retirement schemes went a long time ago). It goes without saying you should really check the costs of private nursing & medical care, you might want to save a bit for that. Being flesh popsicles and all.
Want to know the best bit about what the kids inherit. No debt from the previous generation, that is the hope. Funeral costs aside.
Mind you though you could be lucky. Knew a guy who just decided he should drop the work activities in retirement at 86. He got told he needed to wear his raincoat & put his hands over his eyes during the nuclear blast test and once the heat & blast had passed the crew, (often throwing many across the deck & showing finger bones as if in an xray), they could turn around to enjoy the view. I say he has gained superpowers of still being able to go on hikes & work managing the bar up to 85. No one else his age could do around the village. In fact it is certainly depressing that many cannot make it to 70, (especially with more physical jobs and less healthcare). Many have to leave their homes because of crippling disabilities. Retirement plans often only cover the optimum health path. Most people will die of something else first.
Especially in places like Auckland a rising percentage of people are hitting age 65 still with a mortgage. And if you still have a personal mortagage you probably have a low level of other assets. That's a nightmare. So expenses remain high and they are likely to be leaving the workforce soon. There's a nasty new phrase for it as well "The income cliff"
I have seen much discussion previously that downsizing does not provide any money. For example. Folk do sell the big old family villa and relocate to a more suitable, smaller, lower maintenance house. That has a good practical outcome. However usually the new place costs just as much, and there is little, if any, surplus cash produced.
Hi David, there's been a lot of discussion on the risks of property, shares and cash - but I may have missed any discusion about the implications of a bond bear market (which a few market commentators have been picking has just started).
Given bonds have been the go to for those in retirement - it would be interesting to have your thoughts or the interest teams thoughts on retirement planning during a bond bear market (something which I understand hasn't been the case for a number of decades).
https://www.bloomberg.com/news/articles/2018-01-24/billionaire-dalio-sa…
Yep there are some real implications there. Most senior bond holders are there because of the liquidity bonds offer. Most probably hope to hold until maturity, unless of course it is a perpetual, but selling on a bear market hurts and then there is the brokerage as well. Of course, as you indicate, even while holding , if the yield falls against market rises, that hurts too. That sort of scenario was not long before the 2008 GFC, about the time you could get over 8% on some bank term deposits.
For people in similar circumstances the required retirement income should be an absolute figure. Not a percentage of working income. I know that people spend most of what they earn but they shouldn't increase their expenditure as their pay rises over the years.
eg We are a couple. We have a mortgage free home in Ak. I fix stuff on my car and house myself. Expenditure is about 40g per yr.
I suspect that the figures in the article are higher than this because they include those who are still paying their mortgage off. But if people are sensible they will have paid it off before they retire.
Rates are the biggest worry. They have increased way more than inflation or pay rises and are forecast to keep rising at a rate higher than inflation. Especially when the interest rates rise on the huge amount borrowed by the council.
David , good piece , highlighting a serious potential problem for many .
Many of us will end up decumulating .......... racing through our capital rapidly, which is a double edged sword as the interest income it generates falls as we spend the capital .
Another issue for those holding cash and living off the interest , tax is a big chunk and inflation erodes its buying power very quickly over say a decade .
This is where an inflation proof asset like a second property as an investment, makes sense .
And , a 50 year old can still do this , buy a property and pay it off over 15 years , thus creating a decent income stream over which he has more control than the Board of Directors of Fletchers had over their business .
The big problem with these charts is assuming people require 80% of their income.
If you're working and saving 20% for retirement, and paying 30% of income towards the mortgage, then you only need replace 50% or your income to maintain your current lifestyle.
The easy way to calculate your required retirement savings is to:
1. Calculate your annual expenses (easy way is to take after tax income, and subtract mortgage repayment, kiwisaver and any other retirement savings)
2. Subtract NZ super from your annual expenses
3. Multiply the result by 25
This is how much you need invested earning a return of 4% or more after tax and inflation.
If you had 2 unencumbered rental properties at retirement then you will have a comfortable lifestyle i would say.
Not that hard to do that over a working lifetime but most are not educated on this.
Far better to teach logics at school than most of the rubbish they get taught
gooki - you don't seem to understand that if you're a tenant who receives some form of welfare payment/accommodation supplement you're a 'loser' who failed to get ahead by buying up rental properties - so as a loser who is paying a for a landlords cushy retirement, you need to change your attitude and make something with your life by also buying up many rentals using bank debt, preferably interest only if you can get it. You'll need tenants though, like who you are now, who will eventaully pay for whatever success you have, but the moment you own a building and get others to pay for it you have the moral high ground to call them losers and receive the welfare payments from them that come from government in the form of rent. You are now sucessful and have made something of this life - and you're totally allowed the bag the people that pay your income. Thug life...
Perhaps with BE's recent stepping down, and JKs it would be timely to review the benefits MPs have given themselves for retirement. this should point out just how out of step they are with the rest of the country, and how much they have ripped us off!
Demanding change could be a little challenging though.
While the MPs are annoying at how they have looked after themselves there is still a very good point to learn from this. A very large percentage of your income needs to stream into capital accumulation all your earning life. Perhaps 20% of income every year even. While that might feel brutal at times what's the alternative. ? Tax somebody else vast amounts to give you a retirement income ?
20% isn't far off. The data below shows how many years you have to work bassed on your savings rate (assuming 4% withdraw rate rule, and no super).
Savings %, Number of years
5, 66
10, 51
15, 43
20, 37
25, 32
30, 28
35, 25
40, 22
45, 19
50, 17
55, 14.5
60, 12.5
65, 10.5
70, 8.5
75, 7
80, 5.5
85, 4
90, under 3
95, under 2
What would be good to add to that is a decision to reduce the MP’s to a realistic 90 or so, just as the Royal Commission pre MMP decreed. That would benefit Each and everyone of us, one would think. Was not that part of WP’s manifesto? Wonder what happened to that.
I don't know where the 80% comes from, I guess there are some national statistics to support it.
We see 30% as necessary to meet commitments and amounts above that as discretionary.
But we chose the area to retire in for its low operating costs.
No provision for health, the state will provide.....
A retired couple,with a mortgage free home, needs 84k p.a after retirement ? Seems a bit much.
I would expect $3000 per month could give them a comfortable life, and may be another 15k a year for discretionary spending. As for rates, repairs etc, get the kids to pay that, because you are going to leave the house to them. As in some other societies, the kids may also pitch in for your upkeep ? Sweet as.
The Legatum Institute just released its 10th annual global Prosperity Index, a huge survey that ranks most prosperous nations....
http://www.independent.co.uk/travel/news-and-advice/richest-happiest-he…
The numbers appear to be thought out and accurate, but the income that a retired couple needs must be some distance off reality.
When I am younger, earning steadily, as the theoretical average kiwi I have a mortgage for N years that consumes 30-40% of my income. When that is paid off, at least 30-40% of my income now goes into retirement fund building.
When I retire, I stop building that fund and start withdrawing from it, in theory nothing else changes.
So the 60-70% of my earlier income is a good target.
If this isn't the case.. what are we missing?
The cost of the family that you incur, reduced when they move out.
The cost of keeping up the social whirl, and travel to distant places.
The phrase is reducing horizons as we get older and I think that is a factor.
By 80 most are a little less mobile, as a generalisation.
Hi David,
You appear to have failed to factor in the ability to spend down the capital.
In you example of couple on $105k, you are saying they have to save $1.6M, so they can live off (only) the interest, and then die with $1.6M in the bank.
Surely a more common sense approach would be to spend down the capital as you go, there by reducing the amount you have to have saved.
Regards
Adrian
I have mentioned decumulation in the story, but you are right that I have not dived into decumulation strategies. Maybe another time. There is much more to decumulation than the managing of cash flow requirements however. A whole raft of 'family politics' may be important in many circumstances. This is an area I am not qualified to express an opinion on however.
Another area I avoided, was the use of reverse equity loans. Being asset rich and cash-flow poor is a common woe and there are providers out there willing to 'solve' that issue (including Councils for rates payments).
But both can be used modify the planning for living expense funding in retirement. There are consequences, however.
Yes David fair comment & just to venture a bit more into the field of family politics, or perhaps pressure, there is a rather sad and sinister growth in what is colloquially called elderly abuse. Don’t want to go into specifics but you would not need to pull the curtain back very far to find instances of younger generations considering they are entitled to have now, for themselves, what capital their older relatives may have. Some very nasty hostile examples which speak ill of elements in our society afraid to say.
I understand the complexity, but to not allow for some simple asset decumulation in your numbers is Reductio ad absurdium.
I would have to save approximately all of my income over the next 20 or so years to make your figures.
Or I could live well now, have a moderate sensible saving plan, and live well later off a combination of, superannuation, savings and interest.
The cost of comfortable retirement made by the School of Economics & Finance in Massey
https://www.massey.ac.nz/massey/fms/Colleges/College%20of%20Business/Sc…
According to the report, a couple in retirement age needs $1100 per week to retire very comfortably. That is less than $60,000 per year after tax (see page 6)
This is my journey to retirement.
- Come out of university with high debt and watered down qualifications
- Get job and work enough to finally afford a single story McHouse made of crap Fletchers materials
- Housing market collapses
- Rates and taxes are raised to create more white elephant stadiums, dysfunctional unloved kids and pay for boomers' healthcare.
- Parents gift house to Heartland Bank. When they cark Heartland sells the house to a Chinese landlord.
- Finally pay off mortgage at age 70.
- Superannuation ladder pulled up.
- Assets pillaged to pay for the people who didn't save and went on overseas trips.
- Die childless in a country where English is a second language.
I notice comments regarding downsizing the family home to fund retirement. In my experience this rarely happens in fact most people I meet are downsizing to go into a retirement village not a smaller home. I know that downsizing is an option most people take into account but it is rarely a choice and more likely a necessity.
For boomers a house is more than a home,it is a symbol of status etc making downsizing very unlikely, in fact up-sizing is more likely!!
The Herald article today puts it well when talking about buying an apartment in the same area you own a house. Ideally that would be me, but I can't see it. My home is 250m2 (currently) valued at ~ $10,000 per m2 of living space. North facing with a sea view and no chance my sun or view could be built out. I'd happily downsize to a 110m2 apartment with the same location and aspect but they don't exist. The closest I've seen in an apartment with 140m2 priced at $2 million plus and needing a full refurb. Grace Joel can sign me up as that's likely the next move. BTW: I realise this a First World Boomer example and the other generations will be nauseous, but if I can't see it working with a house of this value then how many others are taking significant cash out and having a life they want to lead?
'Tis a bit of an issue, eh, the apartment mix and pricing here in Auckland.
A lot of them seem particularly bad value compared to apartments in other cities around the world - small, not great quality, and overly expensive for what they are. It seems to be a problem across all the apartment stock here, including many of the new builds.
I know a lot of younger Kiwis also keen on apartments (even to raise kids in) but the choices for them tend to be shoeboxes of poor quality, with high prices.
Maybe those close to the economics of property development could wade in with a reason as to why this is. Small time developers have already told me that affordable new builds are a pipe dream without quality compromises. I’d like to see an apartment option with a quality soundproof insulated shell and fully removable interior walls that could be reconfigured as per needs. It has to be better long term than pulling down buildings after 50 years.
I would imagine some of the price must come down to NZ's current escalated cost of materials compared to other markets (attributed seemingly by most to duopoly conditions / lack of competition). Potentially boom-time labour supply shortages too.
Perhaps a combination of bulk buying power and increasing labour supply (even temporarily as in the case of Christchurch) could help.
Agree re the tech. Have you seen these guys? http://www.climatehouse.co.nz/ Not apartment related, but interesting building tech going on in Otago; insulated, lock-together panels built off site and assembled on-site in days, at cost-parity with 140mm framing - whilst also reducing energy cost.
One of my neighbours sold his brick and tile property for $2.63M in 2016 and moved to Invercargill. They paid a whopping $500K for a mansion down there and still had plenty of money left over for a one-bed city apartment in Lorne St in Auckland CBD for when they come to visit their kids.
This topic is certainly getting a lot of interest. Before I retired I searched for this type of info and found very few were prepared to put real numbers to their recommendations. I am 3 years into retirement now and as a rough guide for a married couple mortgage free in Auckland you need $34k per year and allowing 4% inflation you will need $40K in 5 years, $47K in 10 years, $56K in 15 years and $67K after 20 years. If you own a dog you can add another $2K to the $34K and a second car is probably another $2K. Other things like poor health, dependents building maintenance etc. are obviously extras on top.
One recommendation is to set up your retirement accounts well before retirement and I also recommend two credit cards with very low limits. It is difficult to predict such things as the monthly electricity bill so it is better to be charged against a credit card that is paid off in full each month. Kiwibank don't charge fees and there is no interest if paid on time. The second card is for traveling or online purchase. If scammed this can be cancelled without reorganizing the debit coming out of the other card.
The other thing that is simple is to "snapshot" all account and credit card balances on the 20th of the month to track how your outgoings are tracking. Hope this helps
An excellent article with heaps of great feedback dealing with real life in the comments. I wish there were an awful lot more about this around but there isn't plus these days of extremely low returns on any investments doesn't help anyone at all. This government too is all about looking after the young and giving them the most amazing, toy filled, holiday filled life possible with no thought at all to the older generation. Then there is the ridiculous notion that a single person can live on half of what a couple can - even though the rates, house maintenance, electricity, car costs etc., all remain the same. Doesn't work ......... AND if you own your own home through saving you are penalised by others, who've been either unfortunate in life (don't mind them) AND people who've been downright lazy and didn't want to work receiving all sorts of assistance. There needs to be a very long, hard look taken at the overall age qualification, life qualification and assistance for those on their own.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.