Your best money diet: One you stick to
No, you don’t need $1m before you can retire
How much money do you need to retire?
I thought that if you paid off your mortgage and had a bit in investments (let’s say $100,000) that you would be pretty well okay.
I recently read an article in a suburban newspaper that said large numbers of people reckon they need $1 million at retirement, and many more are attempting to save almost that much.
Do you think $100,000 in KiwiSaver by retirement will be enough?
I get crabby about people putting the word out that you need $1m to retire comfortably.
I even heard recently of a financial adviser who said people need $4.2m, not including their house. That’s beyond ridiculous.
Could that adviser, and others in the financial industry who make similar claims, possibly be motivated by something other than the welfare of the people they are talking to?
It’s generally not bad for people to save more. But there are three worrying effects:
● Some people save too much, depriving themselves of a pleasant life in the meantime.
We’ve had a few letters from “oversavers” in this column. Interestingly, they are nearly always women.
● Others worry unnecessarily. A money coach wrote to me recently: “Some of my work is with people who are on the cusp of retirement. These clients have all done well, most of them have investments (usually residential property investments) valued at around $1m. All of them are concerned that they don’t have ‘enough’.”
● Still others look at the numbers and just give up.
It’s impossible for them to save that much, so they put the whole subject of retirement savings out of their minds, and quite likely end up saving less than they otherwise would.
Whenever you set a goal, it’s important that it’s achievable. If you want to lose 10kg by Christmas, and start out eating only lettuce and drinking only water, you might last a day if you’re lucky. But if you want to lose 5kg by Christmas next year, and cut back on naughty foods, you could very well make it.
Similarly, if you realise you need to save half your income to get to a million bucks at retirement, you might succeed for a week or so. Set your sights lower, with a reasonable and flexible savings plan, and you’ll get where you want to be.
So how far would $100,000 go? There are several rules of thumb about this. The simplest one says that if you’ve saved $X,000 and you retire at 65, you can spend $X a week through retirement. That means with $100,000 you could spend $100 a week in addition to NZ Super. If you retire at an older age, you could spend a bit more.
This, of course, depends on how your retirement savings are invested, and how long you live. But it gives you a rough idea. Your savings will probably last until you die, although if you live past your late 80s, you might not have much left. Many people say, though, that at that stage NZ Super is enough.
How much is NZ Super? For a single person living alone, it’s $463 a week before tax, or about $24,000 a year. For a married couple who both qualify, it’s $702 a week before tax, or about $36,500 a year. Super is taxed the same as other income.
NZ Super is adjusted each year to match the increase in average wages — which is usually higher than inflation. Of course, we don’t know how Super will change over time, but it will probably buy as much in future as it does today.
To put all this in perspective, a 2017 report found that 40 per cent of singles over 65 have virtually no other income except NZ Super, “60 per cent report less than $100 per week from non-Government sources, and 75 per cent have more than half their income from NZ Super”.
Couples over 65 are better off. “For example, only 30 per cent of couples report less than $100 per capita per week from non-Government sources — but most couples are nevertheless still highly dependent on NZ Super, with 55 per cent having more than half their income from NZ Super.”
So there you have it. Someone spending $100 a week from their savings is currently better off than 60 per cent of singles and 30 per cent of couples. Not too bad.
Breaking the rule
I would like to recommend that you remove the wording “rule of thumb” from your vocab. It comes from the law that you could beat your wife with a stick no wider than your thumb — definitely a term to banish please.
You wrote this note after I last used that expression, and since then I’ve been trying to come up with an alternative, but no luck so far, sorry.
Besides which, Wikipedia casts doubt on that origin. It also says, “Its earliest (1685) appearance in print comes from a posthumously published collection of sermons by Scottish preacher James Durham: ‘Many profest Christians are like to foolish builders, who build by guess, and by rule of thumb (as we use to speak), and not by Square and Rule’.” That doesn’t seem to have anything to do with wife beating.
If we start banning words and expressions of dubious origin that are no longer used in an offensive way, our language would be much poorer. Okay, back to financial stuff.
Buy and hold
I am enjoying your book Get Rich
Slow. I have just read a piece of advice I think new investors need to keep in mind, and wondered if you would share it:
“Following the Crowd. You may feel it’s not so bad making a loss if everyone else does. It may be less embarrassing, but there’s no logic to that. You’re more likely to do well if you buy when others are selling and sell when others are buying. Or in many cases, it’s best to just buy and hold.”
What great advice, and definitely helps you sleep well!
That book was published in 2006, but the advice still stands, and always will. Contrarian investing — doing the opposite of most other people — usually beats copying everyone else. But the wisest strategy is to get your investments right and then largely leave them alone.
Could I cheekily suggest, though, that you get a copy of my new book? Among other things, it includes KiwiSaver, which was just a twinkle in Michael Cullen’s eye back in 2006.
Property managers
Another option for the people in your “sell now or later” Q&A is to rent out their house using a property manager. In fact, you never give this as an option to these type of questions.
I am fortunate enough to own a rental property with my brother and we have a property manager. We do use a dedicated property management firm rather than a real estate agency.
I know it costs to get a property manager, but I have to say it’s money well spent. It completely takes all the stress out of it. I highly recommend them.
Obviously it’s worth spending some time finding a good one. We were with a different company to start with and it was awful, so we changed about 12 years ago and haven’t looked back. Good thought, given the correspondent says she’s not keen on being a landlord.
However, there are two problems with using a property manager. One is working out who is good — which may not be easy without trial and error. The other is the cost. Contrary to what you say, I do every now and then mention using a property manager. But it does eat into your returns.
Still, you obviously find it’s worth the money, and the correspondent might too. Thanks.
Residential care
The article about the residential care subsidy and buying a more expensive house last week was very interesting.
The website says: “Assets we don’t count include:
● Pre-paid funeral expenses for you and your partner of up to $10,000 each if they’re held in a recognised funeral plan.
● Personal belongings such as clothing and jewellery.
● Household furniture and effects.”
Could one buy gold jewellery to bring down your assets? Another way of saving and keeping within the limit?
You’re referring to the assets the Ministry of Social Development includes when it’s deciding whether someone over 65 qualifies for the residential care subsidy.
If your asset total is below a certain amount, the Government helps to pay for your hospital or rest-home care costs. If the total is higher, you pay for your own care until your assets fall to the threshold level.
To answer your question, I’ve gone back to our expert at the Ministry.
“While it is true that the legislation does not include jewellery in the assessment of assets for Residential Care Subsidy, there is also legislation that allows the Ministry to use discretion to include deprived assets or income into a financial means assessment,” says George Van Ooyen, group general manager client support services.
“Applications are considered on a case-by-case basis and therefore a definitive answer cannot be given in this forum.”
In other words, when MSD is deciding whether you’re eligible for a subsidy, it can look at steps you’ve taken to reduce the assets or income that would be counted, and effectively undo those steps. In this example, it might include the value of your jewellery.
I can’t see this happening often, but you never know!
Van Ooyen adds, “The Residential Care Subsidy is Government assistance and is therefore funded by the taxpayer”. Good point. And it might not hurt for readers to realise the Government is much more generous than it used to be.
Not so long ago, before 2005, the asset threshold was $15,000 for a single person, $30,000 for couples and $45,000 for couples with one in care. Now it’s way higher, as outlined in the last two columns.
More on the subsidy next week. It’s a topic that always attracts letters.
Mary Holm is a freelance journalist, ● a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send your questions to mary@maryholm.com. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.