What’s your number?

It’s getting pretty close to BBQ season which is one of the best times for me. Sitting outside with friends, reflecting on the year that has been and then chatting about what the possibilities are for the new year, is always something I look forward to. Given I’ve been in financial services for 40 years the question almost always comes up around what we might do in our retirement years: my mates want me to bring out a crystal ball and tell them how much they need to save to enjoy a happy retirement.

My answer over the years has been pretty much the same: “Well that’s easy, the formula looks a little like this:

“If A = the years between the date you retire and the date you die and B = the things you want to do and your cost of living, then B divided by A = C, what you need a year to live on. Pretty simple really.”

The trouble is it’s not. Life is not linear and it is something that comes to mind more and more as we head towards our non-working years.

Retirement is a word that only recently entered the dictionary of life: it came into some level of prominence in the late 18th and early 19th century. But in New Zealand it wasn’t until 1938 that it really became relevant. That’s when some major welfare reforms took place and a national pension, of sorts, was provided that allowed Kiwis to stop work. Before then you basically worked until you died, unless you were born into a certain level of privilege. 

My parents calculated the first part of the above formula ‘A’ as three score years and ten. In their world, that was their life expectancy which is another way to say 70.

My mum and dad were careful with money, based on their experiences as children growing up through the Second World War and hearing what their parents had to live through in the depression, scarcity what real and their reality.

They worked hard and were incredibly generous to their family, so when they reached retirement they had a freehold home, some savings in the bank, and their National Super. They had planned a once in a lifetime trip overseas, which they did, and then pretty much lived life out with family and friends and their hobbies. Their reality for ‘A’ was actually 88 for dad and 95 for  mum. So quite a significant gap from their expected life span, to what was their eventual outcome.

If we look at Stats NZ data to 2019, the average life expectancy for females was 83.5 and males 80 years of age. The thing with averages is that they really don’t work in reality because if you get  to the age of 60 for example the chances of you living a lot longer is much higher.

The next part of the formula ‘B’ is actually where the rubber hits the road. It needs careful consideration and even then some on the list below is really just a best guess.

These include:

• Your relationship status
• Where you want to live
• Cost of living
• Interests, hobbies, and activities that you might continue or start
• Holidays, cars, renovations
• Supporting family or charities
• And probably, most importantly outside your health, when you decide to finally stop paid employment.

When I was at the Retirement Commission, as part of the 2016 Review of Retirement Income Policies, we found that around 40% of Kiwis were working between the age of 65 to 69, either full or part time.  This means, of course, they do not have to dip into their savings, either via KiwiSaver or other investments, and can have their savings working harder for them until they actually need them.

With those two elements worked out, then the answer = “C”. Remember, most of us will get National Superannuation at the age of 65. Looking at the Sorted website, if you have M as your tax code then, for a single person living alone, you would get after tax $463 a week or $24,073 a year. For a couple, who both qualify, the number is $712 a week or $37,035 a year in the hand.

For some that is a good start to take the weight off the daily cost of living. However, this is on the premise that everyone who retires is pretty much debt-free and owns their own home.  The reality is that’s not always the case and the number of non-homeowners is increasing every year.

Massy University Fin Ed Centre updated their guidelines for New Zealand Retirement Expenditure in June of this year and stated what the costs would be for those living alone and couples on a no frills or choices budget. It is well worth reading and the costs look something like this:

One person household metro (those that live in the larger cities):

• No frills budget = $781 per week
• Choices budget = $1107 per week

Two people household metro:

• No frills budget = $931 per week
• Choices budget = $1,578 per week

Clearly this leaves a little bit of a gap, but does help build a foundation for planning ahead. The trouble is most of us don’t do that. The worst thing anyone can do is leave the planning to the very end of their working career. I know happiness in retirement is not solely about how much money or assets you have – there are plenty of people who have a truckload of property and investments etc but are not that happy. What a plan does is give you choices and help improve your overall financial wellbeing.

If you are serious about wanting to land in a good place, or at least have some idea where you might be based on today’s choices, then these are the ingredients that you need to put in the pot to help your future self:

• What age do you want to stop working?
• Think about where you might like to retire. Cost of living may not always be cheaper in the provinces, however you may be able to release some equity out of your current home if you live in the major centres
• Make a list of all your goals and objectives that you want to do in retirement. Rank them if possible and put a dollar cost on the ones you will need to pay for
• It’s really important to work out when you will want to do those activities as well. For example, travel. Most likely you will want to do this earlier, while you have good health and the energy to do those things you may have put off while working
• List other large expenses that you think will come up. Like getting that car you always wanted or refreshing the house and upgrading your appliances etc
• Read the Massey New Zealand Retirement Expenditure Guidelines to help work out your cost of living
• Will there be a chance that you may get some future income through contract work or part time work? If so, this can help offset some of the expenditure you have planned and give you not only a financial benefit but some purpose and connectivity with others. It can also include charity or non-paid work. I mean, how many days in retirement can you go fishing, shopping, travelling and playing golf?!
• Use some of the excellent tools on the Sorted website to crunch the numbers and build a plan based off slightly different scenarios
• What assets do you want to pass onto your children

Invest some time and money with a financial adviser, they can give you a holistic view of your possible future and help with either managing your expectations or finding ways to change your financial activity now to help you get there sooner

Think of the above as a number of different levers that you can pull up or down now to help you get a better picture of what your outcomes could be in the future.

So, what’s your number?