Building retirement savings

Here’s a retirement reality check for the complacent people who haven’t woken up to ‘lifestyle inflation’.

Have you ever been at that dinner party where someone throws the retirement grenade? ‘‘How much money do you need for a decent retirement?’’

It’s casual chat, but ears prick up and napkins rustle as we wonder what fund-size friends and colleagues are aiming for.

Throwing all caveats out the window and removing platitudes to happiness versus cash, I’d spurtforth with an answer; $2 million. That’ll put the rooster in the henhouse.

Of course, for many New Zealanders $2m seems like a ridiculous number.

Call it what you like, but it’s also my honest opinion. For someone with a well-paid professional background who ends their career earning $200,000 a year, that’s the amount I’d expect to see in investments.

That means each of us needs 10 times our final salary in savings to retire.

Ouch. Sorry if it offends, but I can live with that. This model comes from one of the largest US fund managers, Fidelity, and assumes people would like to retire on 45 per cent of their final salary.

Sometimes I wish I told the truth more often. Straightforward, no cotton-wool answers are uncomfortable. They risk alienating or disincentivising those who are doing their best to scrape up any retirement fund.

Are you aged 40? Then you should already have three times your annual salary in savings. 50? There should be six times your salary in a retirement fund already. Haven’t started saving yet? If that’s the case and you’re a 50-year-old, you need to put away half your annual salary.

Rules-of-thumb are as dangerous as they are useful, but I’m relaxed if they serve as a poke and make people save more. The proper thing to do is to take financial advice and review your plan every year to get a personalised model.

In New Zealand our savings scheme is only 10 years old and we don’t like scaring people off. We like to educate and encourage. Yet we run the risk of simply not telling the financial truth in a forceful enough way.

KiwiSaver has the option of investing 3, 4 or 8 per cent of your salary with a further 3 per cent coming from an employer. It’s inadequate.

In the past I’ve suggested 10 per cent should be the minimum and then taken cover behind a rock while I got pelted for numbers that many families simply can’t afford.

No one wants to scare the masses, but there are plenty of middle-class professionals who need a jolly good fright and some strong direction. It’s time to take the gloves off.

You need to save 15 per cent of your salary from the age of 25, or 23 per cent if you didn’t start until you were 35.

For professional couples in their 50s, ask yourself: Why you aren’t turbo-saving and stashing away one whole salary to play catch-up?

Those aged in their 40s and 50s run a high risk of complacency.

Mortgages are paid off, salaries rise and disposable income swells. The risk is your lifestyle swells as well. It’s called lifestyle inflation. The temptation of a new car, upsizing a property and having a relaxed attitude to family holidays are all culprits, along with university costs and house deposits for children.

‘‘We can afford it’’ is lovely to hear, but I seldom truly believe it. Life is all about individual choices and some people prefer to live-andgive now and have a very restrained retirement. Others don’t even realise they’re making that decision.

The simple rules provided by the salary multiplier model can make you stop, think, review and then spend. If you are 50, do you have six times your current salary in savings? Think carefully about your choices if not.

These numbers are supported by Fidelity. While the assumptions behind the calculations won’t apply fully to New Zealanders, they’re close enough for a general discussion. The salary multiplier model assumes wage growth of 1.5 per cent a year during your life, an age of death of 93 and the fund providing retirement income of 45 per cent of your pre-retirement final salary from age 67 with a 90 per cent confidence level.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.

No one wants to scare the masses, but there are plenty of middleclass professionals who need a jolly good fright and some strong direction.

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