Retirement planning - ensuring you enjoy your 25-year holiday
Rather than planning your retirement, plan your 25-year holiday instead! This new adventure is already the reason you’ve been saving all these years, and now you’re wondering what retirement lifestyle you can afford, and how to best go about it. You may also be wondering how you’ll make your funds last.
Whether you’ve just retired or are still five to ten years away, you’re at a critical time.
Times have changed
Recent events have increased the pace of change in many areas – new technologies have been adopted (for instance, “Zoom” video-calls), some industries are becoming obsolete sooner than expected, new industries are emerging, and Covid vaccines have illustrated the potential medical breakthrough that can occur with concentrated investment funding and professional skills.
Changes are impacting retirement income planning too. In years gone by, retirees could simply hold their hard-earned nest egg in bank savings accounts and term deposits. Their reward was a healthy income in the form of regular interest payments. Low interest rates have changed this dynamic, and most commentators and economists believe this feature of the modern world is here to stay.
Your retirement planning goals
For most people, the goal is a simple one – to live comfortably through retirement. It’s also important to consider the details that surround this, including:
- When would you ideally like to retire?
- What do you look forward to the most?
- What income sources are available?
- What is your life expectancy?
- What retirement lifestyle do you want?
- What monthly income will you need during retirement to maintain your current lifestyle?
- How many years do you have left to save and invest?
- How will you spend your time in retirement?
As you work through these goals, try to put them in writing. As you create your written plan, try to focus on the things you can control – such as how much to save and where to invest it.
New Zealand Superannuation
New Zealand Superannuation (often just called "the pension" or "NZ super") is a pension paid by the government to most New Zealand residents from age 65.
Under the current law, any eligible New Zealander receives NZ Super regardless of how much they earn through paid work of any kind, what investments and savings they have, what other assets they own, or the taxes they have paid.
For hard data and suggestions that can assist planning your retirement, you can free download our Retirement Planning Checklist.
For those of younger ages, planning for retirement is an often-overlooked area. In years gone by, employer or government pensions (which can now still be entered on a user-pays basis as a modern annuity) could also be relied upon to provide additional retirement income. Turning to the future, factors such as increasing lifespans, the ageing New Zealand population, and the ballooning cost of NZ Super (if it remains unchanged in its current form) all drive a need for a lot more preparation to go into retirement planning than has been the case for most New Zealanders.
Like most things in life, a bit of planning in advance will better prepare you for achieving your own retirement goals. While it's never too late to start or to make changes to your approach, the earlier you start the better your chances of achieving the retirement lifestyle you desire. As they say, forewarned is forearmed!
Of course, KiwiSaver alone is unlikely to be enough to prepare you for retirement.
You can use your retirement goals as a guide to determine if you are saving enough. If your planned retirement age is more than ten years away, it’s okay to simply target a percentage of your current income as a retirement goal. A variety of retirement calculators and estimator tools are available to help you figure out if your retirement plan is on the right path, or if there’s a shortfall. Just remember that if your results aren't exactly as you planned there are steps you can take to improve your outlook. The key is to at least have the awareness of where you currently stand. It's also a good idea to run a retirement estimate at least once per year.
Review how your funds are currently invested
You're not going to get much further with your retirement plan if you put all your funds into a savings account, term deposit or other "safe" place, than you would if you buried your money in the ground or hid your cash under a mattress. In fact, these supposedly “safe” options are subject to a significant risk known as inflation - which will put a major drag on the purchasing power of a dollar over time. In other words, after taxes are paid on your investment earnings, you'll be able to buy less with your money when you retire than you can today.
How you choose to allocate your assets across different investments can significantly impact your ability to reach your retirement goals. You need to do some self-assessment to determine which asset allocation works best for your particular situation. For example, you could start by assessing your investor risk tolerance, which provides a guideline of how much risk and return you are prepared to take. You can compare your current allocation of investment assets with asset allocation models consistent with your risk tolerance and time horizon. Then, you will want to determine if you prefer a "hands-on" or a more "hands-off" approach to investing. Hands-off (or indirect) retirement investors may prefer the ease and convenience of managed funds and pre-mixed investment portfolios with set asset allocations. Opposingly, hands-on (or direct) investors may prefer active investments such as property investment and directly investing in shares and bonds.
Make it easier by creating a plan you can easily follow
Saving for retirement isn’t a one-time event, it’s a lifelong process of creating good habits. The more you can do to simplify your retirement plan the easier it will be to stay on the right course.
Retiring and living from savings, assets and investments
Currently, as NZ Super pays only a modest sum (which is also taxed) it is advisable to live on income from savings and investments in addition to NZ Super. This typically means investing so that funds generate income, while also spending most or all the funds you have accumulated - as ‘you can’t take it with you’.
There are many ways this can be achieved and via many combinations – which means anyone who is retiring has plenty of choices to make. Regrettably, the stakes are high, as you won’t have the chance to draw-down your funds more than once. This means it is hard to recover any funds or build them up again if something goes wrong.
Just to complicate matters, most people don’t spend consistently throughout retirement. Retirement is often broken into three distinct phases with different outgoing needs:
- Early, from ages 65-74. This period will involve spending more as you tick items off the ‘bucket list’ such as traveling and living an active lifestyle. This phase could still include paid or unpaid work (such as for a charity). For some retirees, they are busier during this phase than they were before retiring! Careful financial planning means you’re more likely to enjoy everything you want in your early retirement years while also safeguarding your future income.
- Middle, from ages 75-84. Typically, this is when spending will drop as you settle into a simple lifestyle. The need to travel, or just the hassle now of doing so, is less exciting and your focus will likely be on more simple things in life. Getting the family to come and visit you becomes more appealing and downsizing the house to move to something smaller with less maintenance also appeals to many. Sometimes, your body is telling you to slow down a little. That said, maintaining regular activity is important as well, though by now you might just need to slow it down a little! The slower pace of life at this phase usually means reduced costs. Ideally in this stage, health-care costs have been planned because sometimes health issues prompt unexpected spending on healthcare.
- Late, from age 85 onward. At this phase of retirement, chances are you’ve done what you have wanted and are now spending more time at home. There is often a transition to managing your own personal circumstances, which can be dominated by managing your health and well-being. Over this phase, medical and care expenses can increase. Cognitive decline is likely in some form, and careful planning of health care is needed, along with support to manage any assets and investments you may have to help meet these costs. Being aware that costs can increase in this late stage of life means holding some of your resources back for use during these years.
Noting the different spending needs above, studying your options and evaluating your goals are all more important than ever.
Make it easy
If you and your spouse are among the generation of baby boomers who have just transitioned into retirement (or you will be soon), you’re probably doing so without the generous workplace pensions that previous generations enjoyed. This means you'll have to cobble together savings and investments from a variety of sources, often including multiple superannuation and KiwiSaver schemes. Figuring out how; to extract a retirement income from these sources, meet other goals such as pass some wealth to the next generation, and cater for your own long-term care will be a challenging process for most.
Facing big retirement choices?
If you're facing decisions about retirement, contact us for help. Our team can guide you to the best solutions to sustain your retirement income.
See how you could benefit from expert advice
Even though everyone’s vision of retirement is different, anyone can successfully invest for it by following a few basic steps. Even if you've been investing successfully for decades, consider whether you might benefit from advice when you develop your retirement plan. During your retirement planning and again when you implement the plan, you'll make some very important decisions that could make or break your retirement lifestyle.
How to retire
If you’re confident that you can handle retirement planning on your own, we suggest you download the free retirement planning checklist available to the right of your screen, then work through the topics below:
- Calculations. Calculate when you can realistically retire. Running some simple calculations will give you a good idea about where you stand – just remember to include taxes and adjust the figures each year for a reasonable rate of inflation.
- Medical. Cater for rising medical costs. Many of your day-to-day expenses in retirement will remain the same. One expense you'll have to increase is your medical insurance or self-insurance (setting aside funds just in case).
- Assistance. Understand New Zealand Superannuation and other benefits. This will reduce the amount you need from other sources.
- Debt. If you’re retiring before all your debt is repaid, such as a mortgage, make sure you understand all the implications and have a clear plan to pay it off.
- Stay on track. Natural changes in life mean that your plan will need adjustment. If you’re not retired yet, make sure you're doing everything you can to set yourself up for success.
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