One of the biggest financial challenges facing New Zealanders over the next few decades will be how to develop a retirement income framework that is economically, socially and politically sustainable.
As our population ages, it is likely that the responsibility for funding retirement incomes will shift from the Government to individuals, thus increasing the variability of retirement outcomes for people and the likelihood that more people will live in poverty in their latter years.
This week, the Commission for Financial Literacy has released for discussion its review of retirement income policies prior to submitting a report to Government.
Alarmingly, the report notes that 40 per cent of New Zealanders aged 66 and over have virtually no other income source than NZ Superannuation.
The next 20 per cent of retirees rely on NZ Superannuation for 80 per cent of their income.
Further data shows that the level of income provided by NZ Superannuation is very close to the OECD poverty benchmark and that New Zealand households save at a much lower rate than their OECD peers.
Recommendations aimed at boosting the level of retirement savings and income include having an auto-enrolment day for all employees who are not currently members of KiwiSaver (with the right to opt out) and undertaking a review of approaches for converting savings, including funds held in KiwiSaver, into annuities at retirement.
Annuities provide regular payments over the course of retirement as an alternative to a lump sum, which is tempting to spend.
The fact of the matter is, New Zealanders need to get better at saving for their retirement and they need to start saving earlier.
Leaving your retirement saving until the last five or ten years of your working life can be a dangerous strategy.
Disaster can easily strike as retirement approaches. Statistics show that earnings reach their peak around the age of 45-50 for the average person.
As you get older, the risks of redundancy and ill health increase, and a break in your career for either of these reasons means you may then be forced to line up for a job along with much younger and fitter competitors.
There is a chance for some people that they will not be able to work full time in their chosen occupation again after a career break late in life. Planning to save for retirement by working past the age of 65 carries similar risks.
Yet another misguided strategy is to plan on downsizing your family home at retirement, thereby releasing cash for investment.
The reality is, many people who downsize move from an old family home to a near-new, low maintenance retirement home in a similar area and there is very little difference in price between the two. In some cases, the smaller, newer retirement home may even be more expensive.
With life expectancies now in the mid-eighties and rising, the average person can expect to live at least twenty years in retirement, and around half of people will live for longer than that.
Twenty or thirty years in poverty is nothing to look forward to. You can choose to spend forty or fifty years working and living it up, followed by twenty or thirty years of misery, or you can choose a more sedate but still enjoyable working life followed by a long and comfortable retirement.
It's all about balance, and understanding the consequences of the financial choices you make. Choose wisely.
Liz Koh is an Authorised Financial Adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.