How much is enough?

Any good financial strategy must have a goal in mind.  Otherwise how can you define financial success

When we meet with clients for the first time we ask them how much dependable income they require throughout their retirement; a period of life which could easily extend 30 years. The easiest way to consider this is relative to your current income.  By calculating what your current (after tax) income is and then deducting amounts going to KiwiSaver/Superannuation, mortgage repayments and other savings programs as well as expenses that you will not have in retirement, then this will give you a good indication for required retirement income.

It is often easiest to think about retirement income as a percentage of your current net income.  Dianne Maxwell, Retirement Commissioner (Commission for Financial Capability), has suggested 70% of current net income as a good starting point.  If you are on a large salary this may more than required, or if on a minimum income you may require a little more.

We are often asked if we believe NZ Super will be available for our younger clients.  My belief is that NZ Super will continue to be an important part of the NZ social fabric as it is a very simple system, and it would be a very brave government that tried to tamper with its universal (available to everyone) application.  However, I also believe the age at which it is available needs to be pushed out, as it has been in most other western countries worldwide.

NZ Super is a great fall-back position and at current bank interest rates is equivalent to holding almost $1.0m in the bank! Nevertheless, if you want more than a very minimal retirement you will need to do your own planning and saving. 

As part of your retirement calculations you need to consider what kind of lifestyle you want to have.  Is owning a holiday home and boat important to you and your family?  If you are running two houses then you have double expenses for rates, insurances, maintenance etc and so need to allow for these additional expenses.  What about international travel, and in what section of the plane?  Fine dining and wine sampling more your thing – then ensure you have allowed for these pleasures.

Or you might prefer a much more local approach to retirement where you are happiest tramping and hiking around NZ’s wonderful mountains and coastline and therefore likely have much more modest income requirements. 

There is no “right” answer regarding retirement income, it depends on your current and planned experiences.  And once you have agreed what percentage of current net income fits your likely scenario you must remember to review this over the years as your aspirations and expectations may well change over time.

No matter what your target retirement income level is, you will need to construct a financial strategy to help you achieve your goal.  Your investment strategy is likely to include bank deposit (for short term needs), KiwiSaver, other regular savings (into something that offers more flexibility than KiwiSaver), as well as estimation of the value of any future funds that you will have available.  This might include a rental property which you could continue to hold for its income or sell at some future date and use the capital, the sale of a business or practice building or any likely inheritance.

As you make these calculations you need to allow for the impact of inflation, not only on your accumulated funds but also your spending requirements throughout what we all hope will be a long and enjoyable period.  While inflation has been dormant around the world over the last 10 years this may not be the case over the next 10 years, and almost certainly not over a full retirement period.

With current synchronised global growth, easy monetary policy is slowly being reversed, interest rates are again increasing (particularly in the US) and so too is the likelihood of inflation with increasing wage and cost pressures.

Ten years ago the official cash rate in NZ was 8.25%.  It has been below 3.5% since 2008 and currently sits at 1.75%.  The relevance of this is that the days of our grandparents where they could reliably live off the interest from their investments is (currently) a thing of the past.  While $1m invested 20 years ago would provide a comfortable level of income, with the impact of inflation and low interest rates this is now closer to $5m. 

Financial Planning is a long game and so inflation is an important consideration. 

In Summary, retirement goals are very personal to you and may vary markedly from your siblings, colleagues and others around you.  And that’s OK!  Perhaps the easiest way to set your retirement income goal is as a percentage of your current net income.  Remember however to update your expectations as your income and aspirations change, and then to update the level of your KiwiSaver contributions and other savings to match your current thoughts..

Sue Stewart (MFAS)