How much will it take to enjoy and comfortable retirement and what can you do to ensure you're taking the rights steps to get there?
On Friday, we spoke to Martin Lewington, managing director of Mercer New Zealand about some of the themes, challenges and savings strategies for Kiwis.
The following is a transcript of our session.
Morrall: Hi Martin. Welcome to interest.co.nz. Thanks for joining us to discuss retirement readiness. I'll fire the first question here. In your opinion, are New Zealanders saving enough for retirement?
Lewington: No, as a country we aren't - there may be individuals that are.
Morrall: So the big question is: how much is enough? And how do we work it out?
Lewington: that is the $64,000 question. How much will depend on your personal circumstances and aspirations. Working it out depends on estimating a number of variables - most of which are very uncertain and to some extent beyond our control.
Morrall: Is 2% of your gross salary (the current KiwiSaver requirement) going to cut it? By some estimates, you should be contributing 10-20% of your salary.
Lewington: Some research suggests that around $40,000 per year is required as income in retirement. We know from our surveys of our Kiwisavers that 50% of them expect that they will need more than $40,000 per year in their retirement to live the lifestyle they aspire to. Our experience indicates that a gold rated pension system would have a minimum of 10% savings over a working life to produce desirable pension level
Morrall: Given that, how far will current levels of KiwiSavings go toward retirement income do you reckon?
Lewington: I believe it highly unlikely that KiwiSaver at 2 or 4% contribution on its own will be enough. We should be looking at a maintenance level government pension - perhaps means tested, encouraging Kiwisavers to increase their contributions and/or making additional savings outside of Kiwisaver perhaps via an employer scheme
Morrall: Many countries incentivise retirement savings through tax deductions against personal income. Is there any similar moves afoot in NZ and do you think that would be an effective way to get people saving, more?
Lewington: In 2007 there was a change to the taxation of financial investments and also on property investment. That's gone some way to leveling the playing field for investment. However, Mercer believes that providing tax incentives for individuals to encourage long term savings - retirement readiness is an important component of a gold standard pension system.
Craig Simpson: Do you think Kiwisaver should be made compulsory for all NZers?
Lewington: NZers have and still do resist any aspect of compulsion. The proposals to widen the net go a long way to increase the numbers within KiwiSaver. The opt out provision means a lot of people remain in the scheme. That said compulsory participation is also a feature of best practice pension schemes globally.
Morrall: For many NZrds, property is their main retirement fall back plan? What's the risk is relying on this for income later on?
Lewington: Property has been good for NZers. However, it now makes up 90% of a households net assets. It does provide shelter and security but it will not provide income or food on the table. Retirees will have to make some hard decisions - selling, trading down or enter into complex financial arrangements - to generate income
Morrall: How about reverse mortgages?
Lewington: A very complex financial arrangement. Retirees will need the best legal advice to ensure they understand the implications and financial advice to understand how much it really does cost them. Maybe you could consider a reverse mortgage with family members?
Ralph: Do you have any thoughts as to why Kiwi's haven't historically been big savers?
Lewington: NZers have a strong desire to own their own home. They also have a universal super scheme. And many have had very bad experiences with investing.
Morrall: Speaking of the NZ Super, how reliable is that for young people today as a retirement income prospect. It's been described as a Ponzi scheme by some.
Lewington: Mercer has done some modelling off the sustainability of NZ Super in current form. Given the demograhic trends, it will require double the level of funding within 30 years. Politicians will have to make some hard trade offs- health care versus super versus policing versus...A solution to the Ponzi scheme maybe the NZ Super fund plus a move more to save as you go rather than pay as you go
Morrall: Can you elaborate please.
Lewington: Save as you go could include more prefunding of a basic universal pension, combined with increasing KiwiSaver contributions and any additional long term savings a household can achieve.
Morrall: Which demographic are you most concerned about in terms of ill preparedness for retirement?
Lewington: It's the younger generation - anyone starting work today and perhaps less than 40. The younger people will look at quality of life, salaries and pensions and compare them to the opportunties overseas. We dont want to lose them.
Morrall: But clearly we are...record emigation. Many claim it's just too hard to get ahead in a low wage economy. What are some practical steps young folk can take to get themselves ready so they don't have to stress later on?
Lewington: Yes, it's a real worry with 50,000 leaving. Young folk should look at the choice they have, read about personal finance, and start a long term saving plan today - join KiwiSaver, start putting money aside in another long term vehicle and put the power of compound interest to work
Morrall: Working to age 67 or into your 70s looks inevitable for these folks, and perhaps even myself. Is this also a reality young people should prepare for?
Lewington: I think we need to rethink the whole issue of how long we work and the differing contributions we can make over our life - yes prepare yourself to be engaged in some way earning income for a lot longer than our parents did.
Ralph: What do you consider the future of the current government pension scheme over the next 20-30 years to be?
Lewington: My crystal ball is fuzzy but I believe age of eligibility will increase, it may be means tested and reduced to a basic maintenance type payment - that won't provide for too much "luxury" in your life. A safety net.
Morrall: Yes, I'll have to start cutting my own hair. In your opinion, outside of KiwiSaver what kind of investments should people be looking at?
Lewington: I think people should only invest in things they understand. NZers are a nation of small business owners - for some it makes sense investing in your business. for others investing in yourself - retraining and ensuring your skills are relevant and valuable. For others there are the traditional financial assets - shares, bonds.
Ralph: If you follow the thought that a major reason for low savings has been universal super, rather than legislating a 'fix' for what could be described as a legislative distortion wouldn't it be better to remove the universal super and let the market sort itself out?
Lewington: I think that NZers have a strong sense of social equity. There would be significant social issues if super was removed.
Craig Simpson: Would having employer contributions be more in line with Australia's encourage more people into retirement savings?
Lewington: I think that there are three parties or stakeholders - Govt, employers and individuals. What we see globally is that our gold plated pension systems, employers do make a contribution.
Ralph: Do you expect the government to allow do it yourself super schemes like they have in Australia and will they be worth trying if you have say $50,000 already saved?
Lewington: I'd like to think so - but I'd like to see KiwiSaver settle down first and KiwiSavers have a good experience, gain financial knowledge and confidence. We also need the regulatory changes to bed in.
Morrall: Excellent. Martin, thank you so much for joining us. This is an important subject and one which is bound to heat up in time. Any final thoughts you'd like to share with our readers?
Martin Lewington: Thanks Amanda. It's a very important issue that needs discussion and debate. There is no boiler plate solution but we as Kiwis need to find one that suits us. We can all play a part in that debate.
Morrall: Indeed. Thanks again for your time and to our quiet readers for following the discussion. Let's do it again sometime.
10 Comments
Yep Ta Amanda......When retiring be sure to invest a little in your hearing.
An elderly gentleman who had had serious hearing problems for a number of years went to the doctor to be fitted for a hearing aid that would return his hearing to 100%.
The elderly gentleman went back for further tests a month later and the doctor said, "Your hearing is perfect. Your family must be really pleased that you can hear again."
To which the gentleman replied, "Oh, I haven't told my family yet. I just sit around and listen to the conversations. I've changed my will three times!"
Time to sell that $800k house in a mid-level Auckland suburb, buy a cheapie unit for $400k and bank the rest.
Question is: Where are you going to find a buyer from the next generation?
Another year or two and that question will get just that much harder to answer.
If you are struggling on a basic pittance and far too many are, it's not rocket science to figure out what will be your fate at the pointy end of life. Unless and until someone takes steps to improve conditions in this country it cannot change. You can say that people need to save more till you're blue in the face, but if there's week left at the end of the money, well you don't need me to spell it out.
As long as govts keep putting things in place to drive wages down, there will be no savings and not enough tax paid to pay super at the end, end of story
Owning your own home will really help keep the cost of living down, especially if it is well insulated, warm and comfortable with low upkeep. Things like solar thermal hot water, PV, and a vegie garden are low cost investments that don't provide cashflow but will help make any savings go a lot futher. If you had a fixed income that you were drawing down every month, it will last a lot longer if the cost of living is low.
Some ideas why people aren't saving enough:
1/ A tax policy which effectively punishes people for saving. A good start to fix this would be a tax free allowance on dividends from savings of individuals.
2/ An economy which is run like a lifestyle block. Thanks to the RMA and a fat bureaucracy it is nearly impossible to start a primary industry which would create large employment opportunities and fix our Balance of Payments imbalance. Remember that Aussie isn't really 'The Lucky Country", they just play their cards better!
Before you retire consider the debasement of the currency!
"The minimum wage increases from $13 to $13.50 an hour, and the training and new entrants' minimum wage increases from $10.40 to $10.80 an hour." herald
That puts the debasement at 3.85%....but reality shows it to be way higher...your savings are losing at least that much every year thanks to the govt policies that Bollard is following to use savings to erode the bloated debts.
Any interest you earn on your savings is taxed...Those getting a whopping 3.5% return from a parasite are already down the hole before tax is stolen to feed the splurging state.
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.