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For me that question is "how much money do I need to accumulate to retire comfortably?’’
The question is important, and it fits well with the logic of setting a destination before embarking on any journey. Much like the social setting, in this column I cannot provide specific or personalised advice. However, there are some questions, and a simple formula, that can be applied when trying to answer this question.
1 When do you want to retire? Or, as I now describe retirement, when do you want work to be optional? Some people might choose the current age of entitlement to NZ Super (age 65) but for others it may be earlier or later. This date not only sets the timeframe for the accumulation of capital but also helps set the timeframe over which funds may be consumed.
2 How long do you think you might live?
Statistics currently suggest a 65-year-old female retiree can, on average, expect to live to age 89. Your family health history may help answer this question, but it is of course nothing more than an educated guess. With life expectancies increasing I recommend that you guess long.
3 What will it cost you to live in retirement? The Office of the Retirement Commissioner suggests that (on average) it is possible to maintain a similar standard of living in retirement on 70% of your pre-retirement income. For this example, let’s use the national average (after tax) family income of around $82,000 — 70% of this figure works out at $57,400 per annum.
4 Do you think you will receive NZ Super when you retire? Under current rules NZ Super is generally not income or asset tested. At this point the political consensus seems to be that this will continue. Currently, for a couple, NZ Super is worth just over $30,000 per annum in the hand. In today’s low-interest environment this is effectively the equivalent of the interest you might earn having around $1million in the bank! Let’s be optimistic and say you will receive NZ Super in retirement.
5 Do you want to spend all of your money? In other words, do you want the undertaker’s cheque to bounce or would you prefer to leave an investment estate over and above any property assets that you may own when you die. In this case let’s say you are prepared to progressively use your capital but do not want it to run out before age 89.
Armed with these answers you can complete the following "back of the envelope’’ calculation to estimate your retirement capital target: (life expectancy minus retirement age) times (required annual expenditure minus NZ Super) = retirement capital target. So if we plug in the figures generated by the questions detailed above the calculation looks like:(89 - 65) x ($57,400 - $30,000) = $657,600.
If we exclude NZ Super from the calculation the result jumps to over $1.3million.
This calculation is very simplistic. It does not take into account investment returns or the increasing cost of living in retirement. An authorised financial adviser will of course use more sophisticated modelling software to answer this question more accurately. But if nothing else this calculation will create a "ball park’’ figure. It also allows you to consider the inputs needed for a more sophisticated modelling process. The calculation of your retirement capital target is just the first step. The next challenge is to work out how to build this capital in a way that is right for you.
For most people KiwiSaver will form part of the answer. But from my experience it is unlikely that KiwiSaver will be the entire solution. In most cases I recommend building an investment base beyond KiwiSaver.
One of the key advantages of this approach, is that it also provides capital that you can access at the time of your choosing rather than just when it is mandated by the government of the day.
- Peter Ashworth is a principal of New Zealand Funds Management Ltd, and is an authorised financial adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.