Tips for funding your retirement
How will you fund your lifestyle frills post retirement? How are you going to afford that yearly cruise once you retire?
The Commissioner for Financial Literacy's 2013 review of retirement income policies found there is an increasing gap between the standard of living that we aspire to when we retire and the standard of living we can afford on New Zealand Superannuation.
New Zealand super for a single person living alone is $357.42 per week after tax. For a married person or someone with a partner New Zealand super provides $549.88 after tax.
While super has been found to be sufficient to provide a no-frills standard of living, it's up to us to make up the difference and pay for the frills we want in our life once our working days are done.
The Commissioner for Financial Literacy suggests we need savings of about $205,000 for a 25 five year retirement on top of New Zealand Superannuation. The New Zealand Financial Services Council estimates we will need more like $300,000 to $450,000 - per person.
There is a wealth of advice available for those thinking about how they will fund the frills in their retirement.
To help you start here are five things to think about when planning for your retirement.
Start early. Or just start.
Personal financial trainer Hannah McQueen says many of us are afraid of the "r" word.
McQueen had a client come in to see her this week. Her client was 60 and you would think well advanced when it came to saving and planning for retirement.
Not so, says McQueen, and this client's attitude to retirement is frighteningly normal.
"People think that by doing nothing they are avoiding making a decision, but doing nothing is a decision," she says.
While it's a good idea to start saving for your retirement early because the benefits of compounding interest started early is one of the easiest ways to grow your retirement savings, McQueen says the important thing is to start.
If you are nearing retirement hope is not lost.
Authorised financial advisor Martin Hawes says somebody in their 50s or 60s still has time.
"And these are often your best earning years."
Have a goal
Hawes says setting a goal is one of the most useful things to do before retirement.
But before you do that you need to work out how much your life of leisure will cost.
McQueen says people often don't know how much their lifestyle costs and if they take an educated guess its phenomenal how wrong they are.
"Pretty much everyone's lifestyle costs more than they think."
A 2013 poll found 53 per cent of New Zealanders wanted a weekly income of up to $300 per week on top of superannuation payments.
Now sit down with a piece of paper. Write down all the things you like to do on a regular basis and the costs.
Then think about the things that you want to be able to do regularly in a week when you are retired whether it's a coffee date at your local cafe or taking in a new movie.
Add in special trips or events you want to do, like a yearly cruise, and tally the cost.
Then factor in all the boring expenses you need to pay to live per week, including food, housing, transport.
Add it together and you should have some idea of how much you need above New Zealand super to live a lifestyle you will enjoy.
Hawes says you should also think about minimising expenses in retirement. For example, you could get rid of your life insurance or income protection insurance.
Or you could sell your home and downsize but he warns you need to be careful about how far you downsize.
"A one bedroom apartment may sound fine but it's not good if you want the grandkids to stay," he says.
The key thing is to have a plan.
"You need to plan what kind of lifestyle you want when you retire. Then you can work out how to get there. Almost anything is possible if you plan, and it is never too late," McQueen says.
And adjust it when required.
"You need to adjust your savings as you age," authorised financial adviser Jeff Matthews says, "it needs to grow to keep pace with inflation, but you also don't want to be the wealthiest person in the graveyard."
Get the free money
KiwiSaver is a no brainer, Matthews says.
KiwiSaver has several sweeteners, including a $1000 "kickstart" when you open your retirement account and a tax credit of $521.43 is there for the taking each year you are in KiwiSaver, so long as you contribute $1,042.86 a year to your account.
Matthews says these tasty subsidies will probably disappear at some stage so he advises to get in while the going is so good.
"It's free money," Hawes says, "this is exactly the reason why you should be in it."
McQueen agrees but with a caveat.
"[KiwiSaver] is a very good thing unless you are going backwards financially or there is a temporary reason why you shouldn't be in it."
And once you have got the free money you must stop thinking of it as such, McQueen says.
"The trouble with KiwiSaver is that people are using more than they should when they get access to it. They are treating it like free money. It's like any windfall, like winning Lotto, generally people lose it within five years."
Build a cash reserve
You either need a buffer of dollars or investments that you can quickly cash up in case you need it once you retire, Matthews says.
He goes by a general rule of thumb of having between three to six months of expenses covered by a cash reserve.
So if you are used to a $100,000 lifestyle you would need about $25,000 to cover you for three months.
An average household income is around $50,000, Matthews says, so for the average person that is a cash mattress of around $12,500 for three months.
Matthews says you should think of retirement saving like a game of one day cricket. You want to plug away at your savings like a cricketer accumulates runs.
"Don't leave it till the end of the game to try and score all the runs."
McQueen takes a different approach and says rather than cash you need liquidity in retirement.
That is, investments that won't penalise you if you need to get out of them quickly and are easy to cash in.
Pay off the mortgage
All three financial advisers agreed paying off your mortgage, if you have one, is a great goal before retirement.
Hawes says it is his number one tip.
"You really want to go into retirement with your cost of housing covered if possible."
With interest rates going up this year and potentially rising to as much as 8 per cent a year within the next few years paying off the mortgage is a fantastic investment, Matthews says.
"I often see situations where people have a very valuable house but not much else. Being debt free is a good starting point."
The best benefit of being mortgage free is just knocking off that weekly payment and doing away with the cost of housing.
If you can not get rid of the mortgage Hawes recommends you rent as it is cheaper on cashflow.
But you will need more investment capital if you rent, he says.
"You would really need enough return from your investment capital to cover the rent."
So of you were paying $20,000 per year in rent you would probably need up to $400,000 investment capital, he says.
Hawes says deciding where you want to live after retirement is a decision to be made as soon as possible.
"A lot of people will have to downsize their houses. It may be in the coming years that everybody will be stampeding to do that."
So make sure you get in first.