OPINION: The amount that you need to fund a decent retirement is a difficult topic.
The Financial Services Council (FSC) has for some time drawn on a survey that it did in 2012 which suggests the average person wants to double the amount of income that they will have from NZ Super (about $300 per week). According to the FSC, the investment capital needed to generate that income is $350,000 - that means a significantly higher level of savings (especially KiwiSaver contributions) than we have at the moment.
Other organisations (eg, sorted.org.nz) have produced different numbers and it is always interesting to try to dig into the numbers to find out exactly why there are inconsistencies. After all, it is reasonable to assume that the people who do the numbers all have the same calculators and, when all is said and done, the numbers do not lie.
In fact, it is not the quality of the calculators that creates the differences but the assumptions that are made. One of the main causes of the different numbers is assumptions on how long people will live. While average longevity is currently expected to be 25 years from retirement, this is consistently under-predicted as improving medical science lets us live longer than expected.
Wisely in my view, the FSC works on the average person living 30 years in retirement. Greater longevity will necessarily mean that you need more money in retirement because you will probably have greater medical costs and because you will live longer. Financially, greater longevity is a double hit even though from any other point of view it is really the most excellent news!
The people who produce the numbers for retirement needs are working on averages. Policymakers and lobbyists need these averages as they want to know what savings rates for KiwiSaver ought to be. However, while average figures and projections on how much people need to save for retirement may be interesting and important for policymakers, they can at best act only as a rough guide for the individual. This is an area where we are all different and where we each have to set our own goals and plans. An average can hide a huge range of situations and needs.
Retirement planning is fraught because it involves long periods of time and lots of variables. The long periods of time mean that small variations in things like investment returns, savings rates, inflation, longevity and housing costs can make a great difference to the amount of capital that you need.
Moreover, the very nature of retirement is changing: people are retiring at a much wider variety of ages. I have clients in their mid-50s (not super rich) who have left their "proper" jobs and have started to ease back from fulltime employment as they decide to do short-term contracts or other part-time work. These people are setting themselves up to enjoy 20 good summers and so, to make the numbers work, commit to remaining in some kind of reduced employment for decades.
I have other clients (some quite well off) still happily working in their 80s because they love what they do and value the engagement. With some easing back early and with others working well past 65 years, an average is not terribly meaningful: nowadays, people seldom retire when the bell rings for their 65th birthday.
To put a number on what you need for retirement is valuable; to put a number on what the "average" person needs is much less relevant. Average means nothing to an individual - so much will depend on what you want to do and how you want to live the later years of your life.
Some will work, some will not; some will invest well, some will not; some will spend capital, some will not; some will use the equity that they have in their houses, some will not . . . the variety is near endless.
You are not an average and have to do your own plan. You should start by doing a budget for your life in retirement. Build in income from NZ Super and work (if any) and then consider income from whatever investment capital you may have (plan on being able to draw about 4 per cent per annum of your capital for income to live on). Leave the averages to the policymakers.
Martin Hawes is an authorised financial adviser. A disclosure statement is available at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.
- Sunday Star Times