The $809,000 retirement scare
OPINION: The Hitchhiker’s Guide to the Galaxy had the words ‘‘Don’t panic’’ in friendly letters on its cover.
The words helped the guide outsell the Encyclopedia Galactica because they brought comfort to inter-stellar travellers faced with the mind-bogglingly terrifying scale of the task before them.
‘‘Don’t panic’’ would be appropriate words for the front cover of Massey University’s Retirement Spending Guidelines, which exists to show people how much they need to secure a pleasant ‘‘choices’’ lifestyle after the age of 65.
For a couple, the sum was $809,000.
That’s a large sum indeed for the average couple to amass before they turn 65, and a Sharesies survey from earlier this month indicated four in 10 people think anything less than $1 million is too little.
There are two good reasons for them not to panic.
The first is that panicking never helps. The second is that once they understand what that $809,000 figure really is, things get a deal less scary.
The $809,000 is the sum needed to be used to fund spending over and above the NZ Super payments the couple will get (hopefully) at age 65 to secure them a ‘‘choices’’ lifestyle.
But what is a ‘‘choices’’ lifestyle?
The researchers based their definition on real-world spending data. They looked at all the one and two-person households with over 65s in them, and looked at what they spent (government data). They then divided those households into five equal parts, or quintiles.
The first quintile were the lowestspending fifth of those households. The top quintile were the highest-spending fifth of households.
The ‘‘choices’’ lifestyle was based on the fourth quintile of households by spending.
If ‘‘choices’’ is for that second to top quintile, and ‘‘no-frills’’ is for the second to bottom quintile, what might we term the bottom, middle and top quartiles?
We could use ‘‘bare bones’’ for the bottom, and ‘‘luxury’’ for the top, perhaps.
But the middle? What about ‘‘perfectly decent’’?
Yes, the quintiles are helpful, really helpful, but are not to be accepted uncritically.
Imagine a retired couple live on a nice rural section, or communally-owned land.
They grow a lot of their own fruit and veges, have solar power and enjoy walks on the beach. They could spend very little and be happy. They might even be in the bottom quartile by spending, while not living a bare-bones existence.
Some groups do not appear in the households on which the data is based. People living with younger generations of their own family, for example. People living in retirement villages, living very nice lifestyles indeed, also do not seem to be counted.
Some spending boosters, like people downsizing their homes to free up capital, or taking a reverse mortgage (the vast majority of the households studied were homeowners), or selling a business, are also invisible here.
And, of course, many younger over-65s still work.
Clearly, there are many strategies people can use, so they do not need to have an investment portfolio of $809,000 the day they turn 65 to live decently, though clearly, if you can, it’s in your future self’s interest to get one.
There’s something else behind the spending data. Younger retirees are more active, more numerous, and spend more.
There are more people in their 60s than in their 70s, and more people in their 70s than 80s. I suspect that means the data is skewed, and gives an impression that people need more than they really do.
Clearly, access to private wealth (and I include some communally-owned private wealth in this) is important in retirement.
Each of us has to work out how to live our lives, including how we get ourselves a home, and pay for the years in which we are no longer in paid work.
But panicking, or assuming $809,000 is the amount you need is misguided.
Now you know, the next question is: What is the amount you need?
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