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RETIREMENT, POLITICS & YOU

No matter who's in power it would seem politicians will look for mileage on the superannuation front.

The three funding components are

  • National Superannuation - a universal state pension payable to all over the age of 65.
  • New Zealand Superannuation Fund (better known as the Cullen Fund) - set up to smooth the cost of National Superannuation as the Baby Boomers start to retire.
  • KiwiSaver - voluntary savings plan with Employer and Government subsidies.

As Governments continue to grapple with the issue of how to fund New Zealanders' retirement income, what needs to be clear is how this affects you.

There is no right or wrong answer - it is only by assessing your own situation that you (or your children) can prepare financially for retirement.

With that goal in mind, we present what we consider to be among the most important pre-retirement questions, together with some facts to help you respond to them.

Is there a need to save privately for retirement?

It may seem obvious to many, but it is a question that's worth squaring away right from the start. To answer it, you have to decide whether or not you personally need a retirement income over and above the government's contribution. The current after-tax New Zealand Superannuation rate can be found on the Sorted website https://www.sorted.org.nz/a-z-guides/nz-super-rates (or IRD Website).

Is that sufficient for you to live the way you want to live in retirement? If not, you will need to accumulate additional private income - a task that will be easier the earlier you start!

How long does retirement last?

In other words, how long is one expected to live...and, by extension, how long should each of us plan to live off our super/savings?

These questions are, of course, unanswerable as none of us knows how long we're going to live for. However, we can say that the average life expectancy in New Zealand is rising all the time. As it currently stands, 65-year-old men can expect to live until they're 83 and 65-year-old women until they're 85. *Source Statistics New Zealand

Unless you have a particular health problem, if you retire at age 65, it would be wise to plan for a retirement of around 20 years.

How much regular income do you need to lead the lifestyle you want through retirement?

This is a very important issue to come to terms with; too many people make the mistake of not coming up with a good estimate for how much they need to have in the bank before they retire.

Much of it depends on your desired retirement lifestyle, but the costs for things such as travel, healthcare and even hobbies like golf can mount up. Also remember that a dollar won't be worth as much in 10 or 20 years as it is today, even if inflation continues to cruise along at a relatively benign 3% per year.

It is widely recognised that you'll need to have an annual retirement income of around 70% of what you earned each year during your peak earning years. And that assumes you've paid off any big items, like your house.

How much money do you want to leave behind for your family as an inheritance?

It's very hard these days for a young family to pay off their first home. Helping your children realise that dream is a wonderful gift to offer them after you've gone. By the same token, in retirement you want to travel and do some of the things you never had the chance to do when you worked. And that costs money...

There are a range of options open to you in this area. At one end of the scale, you can preserve your nest-egg for your children and fund your retirement with the investment returns it generates. At the other, you can plan to spread the spending of your savings over the course of your retirement. The risk is that if you live for a very long time, you may end up with no income. Most people choose an option somewhere in between.

How much do I need to save?

This really depends on your answers to the questions above. However as a guideline a lump sum of $1.5million on retirement would in normal circumstances provide $100,000 of income for up to 20 years. To achieve this amount depends on how long you have to save and if you have anything saved already.

The following table will give you an indication of how much you need to save monthly to achieve a lump sum of $1.5 million. The three columns are based on having no current savings, $50,000 or $100,000 already saved.

Years To Retirement Nil $50,000 $100,000
35 $1,050 $750 $500
30 $1,500 $1,200 $900
25 $2,200 $1,850 $1,500
20 $3,250 $2,900 $2,500
15 $5,150 $4,750 $4,300

The projected annual return on savings is 6% after tax and fees.

You can adjust your savings target based on how much you require annually in retirement. If you require $60,000 a year in retirement, then your monthly savings requirements are only 60% of the above.

Finally, don't forget that once you retire, it's not a case of just sitting back and enjoying the fruits of your past labours. Even in retirement, your hard-earned money needs to continue working hard for you! Investing your nest-egg wisely will be crucial in helping you make your funds last long enough so you can enjoy the lifestyle you deserve.

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