Rob Stock.
Many of us have no idea how much income we will need – but help is at hand, writes
KiwiSaver provider Kiwi Wealth found something odd when developing online tools to help people work out how much to save to get the retirement they want.
As soon as people using its Future You tool were asked to estimate the income they would need in retirement, about half simply shut down the KiwiSaver planning tools and left the page.
It turned out many people have no idea how much income they would need.
‘‘We went into people’s homes and workplaces, and sat down with them to find out what they wanted to achieve with their lives,’’ said Kiwi Wealth’s Ramesh Naran.
‘‘What we found when we started to talk about retirement they all struggled to put a monetary value on it.’’
PLANNING AVERSION
Behavioural psychologists have identified many reasons why people find retirement planning hard, including a natural tendency for our brains to see our future selves as strangers.
Many people find retirement planning complex and intimidating, leading to it continually dropping to the bottom of their to-do lists.
In an experiment for his Mind over Money television show, psychologist Nigel Latta left people in a room with a pen that delivered electric shocks and a book on retirement planning.
He found people were more willing to painfully zap themselves than read the book.
But what Kiwi Wealth discovered was lack of knowledge was also proving a hindrance to many people.
‘‘Planning requires an anticipation of our lifestyle, income calculations, the forecasting of financial risk, and other variables,’’ London School of Economics research fellow Ariel Cecchi said in an article last year.
‘‘People’s lack of knowledge in some of these domains can make retirement planning an arduous endeavour.’’
People did switch on to retirement later in life as their retirement approached, but, Cecchi said: ‘‘It might already be too late at that point to make substantial changes to their pension scheme to ensure an adequate income.’’
ASPIRATIONS
So Kiwi Wealth experimented to see what would happen if it supplied pre-loaded income options which people could pick without having to think too deeply.
Naran said Kiwi Wealth added to its Future You KiwiSaver planning tool: a ‘‘no frills’’ retirement needing income of $744 a week, a ‘‘flexible’’ retirement needing $1075 a week, and a ‘‘deluxe’’ retirement requiring $1114 a week.
No frills was just enough to cover basic living expenses, Naran Source: Kiwi Wealth said. Flexible covered expenses, plus some luxuries and treats. Deluxe included money for foreign holidays.
Kiwi Wealth got the numbers behind the three scenarios from a Massey University retirement income study. When it was originally published in 2015, it drew drew criticism for leaving out accommodation costs.
Naran said Kiwi Wealth had added accommodation to make it more realistic.
People will need to study the three options see if they would work for them because each one assumes the same level of accommodation costs: $350 a week.
In some areas that would be too much, and in others, like highrent, high-rates Auckland, it may not be enough.
As soon as the three options were added to Future You, fewer people logged off, and more completed their planning, Naran said.
NZ SUPER QUANDARY
Using the Kiwi Wealth tool to plan their saving confronts people with having to make a stark choice about whether they believe New Zealand Superannuation will be there when they retire, and at what age. It shows just how valuable NZ Super is.
Someone wanting a flexible retirement (assuming NZ Super is there for them at age of 65) needed to save about $750,000, Future You estimates, compared to more than $400,000 for someone who was content with a ‘‘no frills’’ retirement, or the $800,000 needed for a deluxe retirement.
But if NZ Super vanished entirely, the sum needed for a flexible retirement would be just over $1.1m, a sum beyond many people’s ability to save.
Naran said younger people were showing themselves to be more pessimistic about NZ Super’s future, and frequently excluded it from their planning.
That should lead to them to increase their savings rate.
Treasury’s Mark Vink noted in a recent paper that the lifting of the age people got NZ Super from 60 to 65 between 1992 and 2001 ‘‘led to higher savings rates among affected [younger] cohorts’’.
Many people quickly worked out that if they are able to work longer, the amount they needed to save fell, Naran said.
If someone was unable to save the $750,000 they needed to get their flexible retirement at 65 (again assuming NZ Super is still there), they could decide to work for two years’ longer, dropping the amount they would need to save by about $50,000. Working until age 69 would drop the nest egg they needed to $650,000.
People may be forced to work longer, whether they want to or not. The National Party would progressively lift the age of eligibility of NZ Super to 67 by 2040, if it retains power in the next election.
NEXT STEPS
There’s plenty of work still to do on online retirement planning tools. Kiwi Wealth’s tools, for example, assume people are planning their retirements alone, not as couples, and that they are doing their saving entirely through KiwiSaver.
Naran said that would change, and like rival KiwiSaver provider Simplicity, Kiwi Wealth planned to launch a non-locked-in super scheme later this year to mirror its KiwiSaver. Currently, people who see they need to save more baulk at doing so through KiwiSaver, which would lock their money away until they retired.