Will you be able to afford retirement?
EVEN if your retirement is a long way off, the financial decisions you make today can have a major effect on your lifestyle in the future. So start planning now!
Make a plan and review it regularly – Review your plan at least every two years of whenever your financial circumstances change.
Involve family – They’ll be affected by your decisions and will be able to offer knowledge and support.
Do a budget – You need to know how much your retirement is going to cost.
Most retired New Zealanders get their income from two main sources – a pension from the government, called New Zealand Superannuation and their own private savings.
Your challenge is to work out how much you’ll need to live on in retirement over and above New Zealand Superannuation and how much you need to save to have that extra income.
To be eligible for NZ Super you need to be aged 65 or over and a legal resident of New Zealand, having lived here for 10 years since age 20. Five of those years have to be since you turned 50.
The level of payment is reviewed each year and is adjusted to take account of increases in cost of living inflation and wages. When wages increase, NZ Super is adjusted so that it stays between 66 per cent to 72.5 per cent of average ordinary time earnings after tax.
The amount of money you’ll need in retirement is determined by, how many years you will have in retirement, the lifestyle you want to have, whether you are single or living with a partner and whether you aim to own your own home or rent when you retire
These days, people are living longer. On average, 65 year old men can expect to live till they’re 81 and 65 year old women till they’re 84. In the future, we’ll probably live even longer.
Of course more people may be working beyond the age of 65. But let’s assume you still plan to retire at 65. You need to save to provide the income you want for 20 years.
That’s a long time, so working out how much you’ll need is important if you want to make sure you’ll have enough money in the future.
You probably don’t want to lower your standard of living when you retire – after all you won’t want to stop eating and drinking, taking holidays, buying clothes, visiting friends or relatives, or enjoying yourself in other ways.
But how much is enough? One way is to base your annual retirement income needs on 70 per cent of the annual income you expect to be receiving just before you retire. If you’re well away from retirement, just take 70 per cent of today’s pay.
Next decide whether home ownership or renting is better for you – this will affect the amount of savings you need when you retire.
If you rent, you’ll need substantially more savings to pay the rent but you won’t have capital tied up in a home.
One of your aims should be to reduce the risk of financially unpleasant things happening to you after you stop working. Owning the place you live in, debt-free, will reduce those risks.
For most people, there will be a gap between the annual income that New Zealand Superannuation provides and the annual income they want in retirement. This gap needs to be filled by their own private sources of money.
Basically this comes down to either savings or employment.
Most people end up relying on New Zealand Superannuation and their own savings for retirement income.
Even if you can’t save regularly, try to put aside a few dollars to build up a small nest egg.
Even $10,000 or $20,000 in the bank when you retire will make a big difference.
The total amount of private savings you need will depend on whether you want to use just the income (such as interest) from your savings, or whether you intend to use interest and part of the lump sum (capital).