One common rule of thumb is to aim for a retirement income that's 70-80% of your pre-retirement income. That could change considerably if you had been paying a large mortgage which will be paid off when you retire.
Meet Jane (name changed), a 60-year-old woman from Auckland. Jane worked hard for most of her life, raising two kids and putting them through college. Throughout her career, she focused on paying down the mortgage but never thought much about her own savings until she reached her 50s.
Despite Jane’s hard work throughout her career, she is now faced with the harsh reality that her retirement savings may not be enough to cover her expenses for the next 20 or 30 years. She feels anxious about her future and worries that she won’t be able to afford the retirement lifestyle she envisioned. Like many others in her position, Jane never considered the need to save for retirement until it was too late.
As a result, Jane is now forced to work longer than she had anticipated and has to sacrifice her lifestyle just to make ends meet.
Jane’s story highlights the importance of saving for retirement, regardless of age or career stage. In this article, we’ll discuss how much you should save for retirement in New Zealand and why starting early is crucial.
The current retirement landscape in New Zealand
Before we dive into how much you should save for retirement, let’s take a look at the current retirement landscape in New Zealand.
Most Kiwis have multiple sources of income during retirement to ensure financial stability. NZ Superannuation is one of the main sources of income for Kiwis in retirement. However, it’s important to consider other sources such as personal savings, investments, and any additional employer or private pension plans. By diversifying your sources of income, you can reduce the risk of running out of money and have more flexibility in your retirement lifestyle choices.
The two main income sources for retiring Kiwis are NZ Super and KiwiSaver.
NZ Super
NZ Superannuation is a state-funded pension scheme that provides financial support to Kiwis over 65 who meet the eligibility criteria. The scheme is administered by the Ministry of Social Development and is funded through general taxation. As of April 2023, the maximum weekly payment after tax for a single person is $496.37; for a couple, it’s $381.82 (each). The amount you receive depends on your relationship status & living arrangements. While NZ Superannuation provides some financial support, you may need more to cover all your expenses during retirement.
KiwiSaver
KiwiSaver is a voluntary savings scheme designed to help Kiwis save for retirement. It’s open to anyone under 65 and has various benefits, including employer contributions, government contributions, and tax credits. With KiwiSaver, you have a simple and effective way to save for your retirement, regardless of age or income level. KiwiSaver offers a range of investment options, including conservative, balanced, and growth funds, allowing you to tailor your investments to your risk tolerance and retirement goals.
Challenges facing retirement savings in New Zealand
While KiwiSaver and NZ Superannuation provide some support for retirement savings, they may not be enough. There are still several challenges facing Kiwis who want to build a comfortable retirement nest egg. One of the main challenges is the rising cost of living, particularly housing costs. High housing costs can make it challenging to save for retirement, as Kiwis may have to use a larger portion of their income to cover housing expenses, leaving less money for savings.
Another challenge is the lack of financial literacy and planning. Many Kiwis are unaware of how much they need to save for retirement or do not understand the different investment options available.
Finally, changes in government policies can also impact retirement savings, with the potential for changes to the age of eligibility for NZ Superannuation and change to KiwiSaver regulations.
Determining retirement savings goals
Now that we know the challenges facing retirees, let’s discuss how you can overcome them. One important step is determining your retirement savings goals to ensure you have enough money to live comfortably during your golden years.
Factors that influence retirement savings goals
The retirement savings needs of an individual can vary greatly depending on several factors. Age is a significant factor, as individuals who start saving earlier will have more time to accumulate wealth and compound interest. For instance, someone who starts saving in their 20s will need to save less than someone who starts saving in their 40s to achieve the same retirement income.
Lifestyle is another factor that can impact retirement savings needs. Some individuals may want to maintain a lavish lifestyle during retirement, while others prefer a more modest lifestyle. Those who want to travel, engage in expensive hobbies or live in a desirable location may need to save more for retirement to maintain their desired lifestyle.
Desired retirement age is also an important factor. The earlier an individual wants to retire, the more money they need to save to support their retirement lifestyle. Retiring earlier means a longer retirement period, requiring more savings.
Considering these and other factors is important when determining your retirement savings goals.
How to calculate retirement savings needs
Calculating your retirement savings needs can be daunting, but it’s an essential step in planning for your retirement. To determine your retirement savings needs, consider your current income & your desired retirement lifestyle. One common rule of thumb is to aim for a retirement income that’s 70-80% of your pre-retirement income. That could change considerably if you had been paying a large mortgage which will be paid off when you retire.
You can also create a retirement budget that includes all your expected expenses, such as housing, food, transportation, healthcare, and entertainment. Once you have a budget, you can estimate how much income you’ll need to cover these expenses and maintain your desired lifestyle. Subtract any expected income from sources such as NZ Superannuation or other pensions from your retirement income goal. The remaining amount is the total amount you’ll need to save for retirement. There are several online retirement calculators available that can help you estimate your retirement savings needs based on your individual circumstances.
Working with a financial planner can help you create a personalised retirement savings plan that considers your circumstances, helping you achieve your desired retirement lifestyle.
Importance of starting early to save for retirement
Starting to save for retirement early is crucial, as it provides more time for your investments to grow and compound. The earlier you start, the less you need to save each year to reach your retirement goals. For example, saving $100 per month at age 25 with an average annual return of 7% would result in retirement savings of over $250,000 at age 65. However, if you wait until age 35 to start saving, you would need to save around $225 per month to achieve the same savings amount.
Starting early also provides flexibility in retirement planning, allowing you to take more risks with your investments and adjust your strategy over time. Delaying the start of your retirement savings can also mean being forced to work till you are older, potentially missing out on your desired retirement lifestyle.
In summary, starting to save for retirement early is essential for reaching your retirement savings goals, allowing you to take advantage of compounding interest and flexibility in planning.
Common mistakes to avoid when saving for retirement
Here are some common mistakes to avoid when saving for retirement:
Not starting to save early enough
As we discussed earlier, starting to save for retirement early is critical. Waiting too long to start saving can make reaching your retirement savings goals challenging, and it may mean having to work longer than planned.
Not contributing enough to retirement accounts
Many people do not contribute enough to their retirement accounts, such as KiwiSaver, to reach their retirement savings goals. Understanding how much you need to save and regularly contributing the necessary amount to your retirement accounts is essential.
Not diversifying investments
Relying on a single type of investment or asset can be risky. An asset type, such as property, may have done very well in the past, but there is no guarantee that it will continue to do so. Diversifying your investments can reduce risk and improve your chances of reaching your retirement savings goals.
Underestimating expenses in retirement
Many people underestimate the cost of living in retirement, resulting in inadequate savings. Planning for unexpected expenses, such as healthcare costs or emergencies, is essential to avoid running out of funds in retirement.
Failing to adjust savings strategy
Life circumstances can change, and adjusting your savings strategy is essential. For example, if you get a raise or receive an inheritance, consider increasing your retirement savings contributions to take advantage of these additional funds.
Not insuring yourself against unforeseen events
Unforeseen events such as accidents, illnesses, or disability can significantly impact your ability to save for retirement. Having adequate insurance coverage is essential to protect yourself and your family from unexpected financial burdens. Failing to insure yourself against unforeseen events can deplete your retirement savings, making it challenging to achieve your retirement goals. Therefore, it’s crucial to review your insurance coverage regularly and ensure that you have adequate protection.
By avoiding these common mistakes, you can ensure you are on the right track to achieving your retirement savings goals.
Conclusion
Saving for retirement is crucial to achieving a comfortable retirement lifestyle. In New Zealand, the state pension, NZ Superannuation, is one of the primary sources of income for retirees, but it’s essential to have other sources of income, such as KiwiSaver. There are several challenges facing retirement savings in New Zealand, including a high cost of living, increasing life expectancy, and insufficient savings levels. To determine your retirement savings goals, consider your age, lifestyle, and desired retirement age.
It’s critical to start saving for retirement early, avoid common mistakes such as underestimating expenses and not diversifying investments, and insure yourself against unforeseen events. Following these guidelines can improve your chances of achieving your retirement savings goals and enjoying a comfortable retirement. Remember, it’s never too early, nor too late, to start saving for retirement. The key is to take action and start today!
It’s easy to put off saving for retirement and assume you have plenty of time to catch up, but the reality is that time flies by quickly, and it’s essential to start building your retirement savings as early as possible. Every little bit counts and even small contributions can add up over time.
So why not start by setting aside a portion of your monthly income and contributing more to your KiwiSaver account or other savings? The earlier you start saving, the more time your investments have to grow, and the better off you’ll be in retirement. So take that first step and start saving for your future today!
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