Preparation is key for retirement
Q
I recently turned 62 and I have paid off my mortgage at last. I have $48,000 in my KiwiSaver account (balanced fund) and $25,000 in a bank term deposit. My husband passed away two years ago and I live alone. If I keep working and contributing at my current rate of 3 per cent until age 65, how much will I have in KiwiSaver and how much help will it be to me? I earn $72,000 per annum.
A
Congratulations on paying off your mortgage before retirement! This is a very good time to sit down and work out how much you can afford to put aside, both for your retirement or for any other financial goals you may have.
On your current salary you will be bringing home $1041 per week (after tax and your KiwiSaver contributions — go to www.paye.net.nz to see the breakdown). In three years’ time you should qualify for NZ Super. If you were to give up work and try to live on NZ Super alone now, you would have to shrink your budget to around $437 per week.
Your KiwiSaver and bank savings are there to put some cream on top. Go to the Sorted calculators for KiwiSaver and retirement planning. By their reckoning, if you continue at your current level of KiwiSaver contributions you will have $61,574 in your KiwiSaver by the time you turn 65 (without adjusting for inflation).
Your bank savings may grow to $25,600.
Can you increase your KiwiSaver contribution rate to 10 per cent? This will reduce your take-home pay to $944 a week but will give you around $75,462 in your account at age 65.
Sit down and work out just how much you will need to live on week to week once you retire, then see how much of your current income you can save. If you can put $200 per week into a savings account, this will give you an additional $31,200 at retirement, giving you total savings at age 65 of around $132,262 (this is assuming you increase your KiwiSaver contributions to 10 per cent).
The extra savings will not only give you a bigger nest egg, it will also help you adjust to the drop in income when you stop working.
The Retirement Planning tool on the Sorted website estimates that total savings of $132,262 this will be enough for a “no frills” retirement for a single person living in the regions but not quite enough if you live in a main centre.
You will need to decide how to fund home maintenance, car upgrades and any travel you would like to do — taking big chunks out of your savings early on will mean less money later. Some retired folk generate extra income by letting out
a room or taking on a part-time job cleaning or gardening.
For many, selling the family home and moving into something smaller is an option to free up funds for retirement. This doesn’t always work as planned. The number of baby boomers with the same idea may put pressure on the type of property you’d be looking at and, along with the cost of moving, you may find there’s not much left to top up the coffers.
When you turn 65 there is no magic wand that will suddenly make it easy for you to manage on 40-50 per cent of what you are earning. This is a good time to prepare for a drop in income. While it is nice not to have to watch every penny, you don’t want to look back and wish you’d been just a bit more frugal when working.
Shelley Hanna is a Financial Adviser with Peak Portfolio Management Ltd, which holds a licence FSP702451 issued by the Financial Markets Authority to provide financial advice services. Disclosure information at www.peak.net.nz or call 06 8703838. The information provided in this article is of a general nature and should not be relied on as a recommendation to invest in a financial product. Send your KiwiSaver questions to shelley.
hanna@peak.net.nz