As you navigate the hustle and bustle of daily life, retirement might seem like a far-off milestone – something to worry about in the future.
However, it’s never too early to start planning for a comfortable future. Plus, with increasing life expectancy and changing retirement landscapes, it’s more important than ever to plan for this stage of your life.
So, what can you do today to make sure you’re setting yourself up to have more than enough when it comes time to retire?
Knowing how much you’ll need is key
When you’re thinking ahead to retirement, you might not necessarily have a number in your head as to how much money you’ll likely need when you get there. You may be expecting that working hard, contributing to KiwiSaver, and saving a little on the side is going to be enough – alongside superannuation – to cover your costs when you retire.
However, it’s becoming increasingly unlikely that New Zealand superannuation will be enough to cover a comfortable retirement for many Kiwis.1 That’s what can be confusing about retirement planning – a little might be plenty if you have a frugal lifestyle, while others will need to have built enough wealth elsewhere to cover even just their basic lifestyle needs.
So, what will be enough for you?
This will largely depend on your lifestyle costs – the amount you spend each year to cover bills, food, and all the fun stuff. This number multiplied by 25 (based on an average life expectancy of 90 years and a retirement age of 65) will give you a rough idea of what be ‘enough’ to last your retirement years.
As an example, we’ve found that for the average enable.me client, that lifestyle cost comes to about $100,000/year for a couple. Which means they’d be looking at needing about $2.5 million to fund their retirement. Crucially, this assumes that you will be mortgage free on your home when you retire. But don’t freak out, you may already be part way there.
Next, work out how much you’re on track to have
Now you have a rough idea of what you need to be working towards, it’s time to take stock of what you’re likely to have based on your current saving and investing activity.
Your KiwiSaver statement, for example, will show where your savings are likely to end up based on current contribution rates and average returns (which is influenced by the fund you’ve selected) but there are also plenty of online calculators you can use to calculate what you’re likely to have at age 65.
Add that to projections for what any other investments and savings will total by then, as well as what you can expect to receive from New Zealand super over 25 years, and you’ll have a fair idea of how much money you’re currently on track to have.
There’s likely to be a difference between this number and how much you will actually need – but it’s good to call that out sooner rather than later. That will then give an indication of how hard you’ll need to work to make up the difference, and how long you’ve got to achieve it.
By which we mean… get your money working harder
If you’re not on track to have enough, now is the time to start thinking about how to bridge that gap. If you are on track, it’s wise to look at how working a little harder to bolster your retirement funds to either protect your nest egg from economic volatility or a change in circumstances, or to give you options to retire earlier or scale back work hours sooner.
The best way for you to grow your wealth will depend on many things, including how large your gap is and how much time you have to make up the shortfall.
We find when there is a gap greater than $300,000 and there are less than 10 years to close it, investment property is often the best bet to get that gap closed. This isn’t because property itself has any magical powers, but because of the power of leverage. For example, you put $200,000 into a $1 million property2 and borrow the balance from the bank, but benefit from the capital gains on $1 million – rather than the gains on just the $200,000, like you could if that was invested in, say, a managed fund.
That’s not to say that a managed fund isn’t a fantastic investment option. If you have a smaller gap, more time to make up the shortfall, and don’t have a mortgage on your home, then a managed fund may be the ideal solution for your situation. If you already have an investment property, a managed fund can be a great tool for adding diversification to your portfolio.
Retirement doesn’t mean you have to stop
Just as retirement doesn’t mean we stop living, or even necessarily stop working – it also doesn’t mean we stop growing wealth. We don’t hit age 65, liquidate our assets, and keep the money under the mattress.
After all, 25 years is a long time, and a time during which your money can continue to grow. You may however change where or how your money is invested, and you’d likely be looking to liquidate some of it at different stages, to ensure your short-term needs are always met.
So, as part of your retirement planning, you also need to plan for how you’ll manage your money and your cash flow during those years of leisure and adventure, to make sure it lasts.
Some of the questions you need to consider include: if you have an investment property, when would you look to sell (considering market conditions, the property’s cashflow, and your cashflow requirements) and what will you do with the proceeds? If you have managed funds, how will you manage taking out money to cover your day-to-day costs – or that trip of a lifetime you’ve been hanging out for?
Retirement should be a time to look forward to, and a time when you get to reap the rewards of your hard work. While having enough at retirement is no longer a certainty, there are ways you can strengthen your position and ensure you have enough to fund your retirement so you can live out your days in comfort (or lavish luxury, if that’s what you want!)
If all of that sounds a bit overwhelming, you can get an experienced financial adviser to help you plan for your retirement, by booking in a consultation with one of enable.me’s financial coaches via enable.me/verve
enable.me is New Zealand’s leading personal financial coaching and strategy company focused on helping Kiwis take control of their money, achieve their financial goals, and unlock the freedom to live life on their terms.
- New Zealand Retirement Expenditure Guidelines 2022, Massey University NZ FIN-ED Centre
- Based on buying a ‘new’ build property which would only require a 20% deposit
