Retirement savings - final steps
When retirement is just around the corner...
Where did all the time go? Suddenly retirement is a lot closer than you ever thought - only 10 or 20 years away. We take a look at the steps you could take further down the road to your retirement. We also consider the options of buying your first home at this stage or continuing to rent.
Having "enough" income in retirement will be different for everyone. How much do you want to keep the cultural and social interests you have now - the visits to the theatre, travel, eating out?
Over the past few decades the retirement landscape has changed markedly. Traditionally, the availability of NZ Super meant people could be relaxed about saving for retirement. But NZ Super was introduced at a time when life expectancies were lower - and so was the cost of living.
A 2011 survey for the Financial Services Council showed the income Kiwis felt would give them a comfortable retirement was, on average, almost double the amount provided by NZ Super. Add to this the fact that an ageing population puts the future of NZ Super in doubt (at least at its current levels) and it's clear most people will need additional funds for their retirement.
To work out how much you need, think about:
- how long you're likely to be retired
- how much you're likely to spend once you’re retired.
The length of your retirement is determined by when you retire and how long you expect to live - which is something most of us don't like to think about. If you retired today, aged 65, you could probably expect to live at least another 20 years if you are in good health.
When it comes to expenses in retirement, the most important are debt and housing costs. Paying rent or a mortgage can be both financially and emotionally draining. Beyond these expenses, most other spending is discretionary and can be adjusted or cut more judiciously - examples are holidays, entertainment and clothing.
You're in your late 40s or early 50s. You have children in their mid to late teens still at home and you’ve probably discovered that ... they're just plain expensive, with adult tastes and costs. Education costs are increasing: the school uniform needs replacing, and there’s paying for that school trip to Japan. Tertiary education costs may be coming up. Will the kids be staying home to save money, or moving out and taking up a student loan? How much are you able to help with these costs? This can squeeze your ability to put money away for retirement.
Perhaps you've gone back to being a 2-income family as the kids have got older. This may help offset the expense of the new adults in the household and give you the opportunity to pay off a mortgage faster or set more aside for retirement. You could increase your KiwiSaver contribution to the highest rate (8 percent). Any raises or bonuses can be put into getting rid of debt or into savings. You may have received an inheritance or some other windfall that can be invested.
Take a look at your household budget and assess where things might be able to be tweaked in future, if not now. But don't forget any necessary increases such as the premium for having drivers aged under 25 included on your car insurance.
Or maybe you're closer to being eligible for NZ Super - perhaps less than 10 years away. The kids have left home or at least aren't fully dependent on you. Now's the time to really put the work into that nest-egg you're going to need to make retirement more comfortable.
The Commission for Financial Literacy and Retirement Income's website sorted.org.nz suggests you focus on reducing debt, starting with high-interest debt like credit cards and then your mortgage. Getting rid of that mortgage before you retire makes sense. A home loan of $50,000 with a remaining term of 5 years would cost $221 per week at current floating rates of 5.75 percent. NZ Super is $549.88 for a couple per week and $357.42 for a single person. That doesn't leave much over after the mortgage is paid, unless you have other income or are planning to work after you turn 65.
In those final few years before retirement, check whether you need to replace your household appliances - once you're on a fixed income you won’t want the surprise of having to repair or replace older appliances. Our survey of the [life expectancy of appliances] will give you an idea of how long a fridge or washing machine should last.
This is also a good time to assess what type of car you're driving and whether you want to change to something smaller and cheaper to run. One retirement expert said she'd heard of people buying a household item, such as towels or bed linen, every fortnight while they still had income - a retirement version of the old-fashioned pre-marriage "glory box".
Let's look at 2 savings scenarios for this lifestage and what they involve.
You've saved throughout your working life ...
By now you should have built up a good nest-egg and you’re hitting your final stretch.
You may want to rein in any volatile or risky investments and start playing it "safer". You want to grow steadily and consolidate rather than take risks in volatile markets. This means reducing your exposure to shares and increasing the amount you have in fixed investments such as bonds and cash.
Some advisers suggest varying your share investment with age: if you plan to retire at 65, about 50 percent of your money should be in fixed-interest investments when you're 50; at 60, this increases to at least 60 percent.
You're playing catch-up ...
It's never too late to start saving. First, though, you need to clear any debt. Then, maximise your savings. If you can afford it, increase your KiwiSaver contribution to the maximum 8 percent. This may also involve cutting back on expenses - or at least being careful not to let these eat away surplus cash. Make sure you put away in your investments a portion of any bonuses or extra cash you receive.
Your investment strategy will be different from a younger person's or someone who’s saved throughout their life. It has to strike a balance - you'll need to increase your savings as much as you can, but you don't want too much risk (you won't have time to recover from a huge loss in the sharemarket, if that happens).
This type of strategy means you may want to invest in shares but you should stick to "blue chip" shares (shares in well-established companies). You should also try to supplement these shares with a healthy dose of fixed-interest bonds to diversify the mix and reduce your risk.
Buy or rent?
What if you've never owned a home but now have the means to do so? Should you keep renting … or take on a mortgage in your 50s?
If you plan to rent into retirement you need to think about how secure and affordable your rental will be. A private landlord is only required to give you a few months' notice to leave. Can you get a long-term rental in an area which has the amenities you need - access to healthcare, public transport and family for instance? The ideal scenario could be a rental owned by a family member.
Rental units in retirement villages are scarce and vary in cost. "Social housing" - rentals provided by councils or charitable organisations - can have drawbacks in quality and location.
If home-ownership levels continue to fall, the demand for rental properties may increase - and push up the "price" of renting. So you need to be able to afford rent increases. According to figures from the Ministry of Social Development's 2012 report on household income and trends in inequality, renters aged 65 or over are 9 times more likely to be living in hardship than mortgage-free homeowners. The proportion of superannuitants needing the accommodation supplement - a top-up for people with high housing costs relative to their income and savings - is rising.
Choosing to rent may mean you have to compromise on where you live and what size property you live in. A 2-bedroom flat or house in Whanganui costs on average $173 per week to rent - about a third of the amount a couple would receive in NZ Super. In Orewa, you'd be paying nearly $360 per week.
Most people see owning a home as the safer option in retirement. For late starters, the more saved the better. Lenders may be reluctant to let you borrow too much for too long, especially if you don't plan to continue working after 65. A sizeable deposit allows you to borrow less, shorten the length of the home loan, and pay less in interest. You should still aim to have it paid off by the time you retire.
To keep your mortgage repayments manageable, you may have to opt for a modest house. But this could be the home you spend your retirement in, and so you wouldn’t need to downsize later.
Buying a home and paying off the mortgage before you retire also gives you the option of a reverse mortgage or "home equity release" to provide additional retirement income. But there are pros and cons to these. See our reverse mortgages report for more detail.
Case study: Owen and Lucy
Owen is in his early 50s. He's always rented, but has recently married and is thinking about buying a house. Between them, Owen and his wife Lucy have a $150,000 deposit (from an inheritance and savings). They're looking at a $400,000 property in Wellington and want to be mortgage free by the time they’re 65. The aim is to either stay put or downsize to a cheaper property out of the main centres. Can they clear a mortgage in that time?
Owen and Lucy want to repay their loan in 13 years and will need to borrow $250,000. If future mortgage rates average 7 per cent a year (a little higher than current record-low rates) they'll have mortgage payments of almost $30,000 a year (over $560 per week). With Lucy's two teenagers also living with them, their current annual budget - and their annual budget if they bought a house - might look like this.
|Owen and Lucy's annual budgets
|Rent ($550 per week)
|House & contents insurance
|Repairs & maintenance
|Food & groceries
|Power, phone, internet
|Transport (includes car)
|Life, health, income-protection insurance
|Eating out, relaxing
|Gifts, charity, sport, hobbies, pets
|Reading & entertainment
|Hair, cafes, Lotto, personal
Owen and Lucy will need a combined net income of $85,600 a year (after KiwiSaver contributions and PAYE) to afford their house and pay it off before they turn 65. Otherwise they'll have to look at a cheaper house, or carefully look for where they can reduce their spending - at least in the early years of the mortgage. Over time inflation will gradually reduce the "real" cost of their mortgage (everything else goes up with inflation). And they'll have an asset at the end of their 13 years.
These budgets and analysis were provided by Simon Hassan, authorised financial adviser and Director of Hassan & Associates. His disclosure statement is available upon request. His company's website is www.hassan.co.nz.
Report by Amanda Lyons.
A saver's worst enemies
Inflation, interest rates, and general bumps in the road can all have an impact on your savings plans.
This is the rate at which the price level for goods and services rises, and the rate at which purchasing power falls. Inflation remains the hidden monster that attacks retirement savings because it devalues them over time - and it must be taken into account when you're calculating your retirement savings.
Inflation here has averaged 2.7 percent since 2000, so this is a good rate to use as a basis for your calculations.
One of the mechanisms the Reserve Bank uses to fight inflation is a tightening (lowering) of interest rates. For savers, though, rising interest rates are a good thing: if they're re-invested, they help increase your savings.
But when interest rates are low - as now - savings accounts and fixed-interest investments can take a hit. That's important to think about when you’re looking at your mix of investments - do you have some growth investments that may do better in a period of low interest rates?
Bumps in the road
Health problems, divorce, career setbacks or redundancy ... these can all bring your finances to a grinding halt. Health and income-protection insurance are worthwhile if you can afford them but the key to coping with these bumps is being prepared: ideally, you should aim to have the equivalent of 2-3 months' income as an emergency fund. However, even a small emergency fund is better than nothing.