It is now pretty well known that most people need government super plus another $200 to $400 per week to enjoy a comfortable time retirement. The good news is that most of us can get to retirement with this extra income if we take some basic steps.
However it is all too easy to avoid this subject and end up with a pretty basic retirement.
“I’m too busy to think about it, it’s too hard, Kiwisaver will do, I don’t intend to stop work, I may not live that long, mum and dad will leave me a big inheritance, the kids need help, I’ll start next year, I’ll put in some money when I have some, I’m going to borrow more money and buy a bigger house ” are all retirement killers.
This is number one in a series of articles (in no particular order) of retirement killers that we need to avoid.
Too many people think they have to stop at age 65, and have not done the forward planning that should start before retirement.
Preferably the planning will start well before retirement and will be reviewed annually. You should undertake bluntly honest reviews of your circumstances and how you are proceeding.
Then when you get to age 65 you will already be well aware of the issues, and most importantly know what cash flow you will have if you retire on your 65th birthday. Never forget “cash flow is king” today & tomorrow.
James and Mary
Here is a typical scenario I often see - James is nearly 65 and his wife Mary is 62 (names and some details changed for privacy reasons). At 65 James will get government super of $13,000 per annum and Mary will have to wait another three years until she gets her super of another $13,000 per annum.
They have a debt free home valued at $450,000 in a nice town, and $150,000 in savings. James is planning to retire at 65.
Mary is not working which is quite common, as women seem to slow down and stop work earlier than men. This is probably because women have a permanent (unpaid) job already – running the family home.
What will their retirement income be ? $13,000 super plus $7,500 - $150,000 invested in a diversified portfolio at say 5% pa. net of tax is $7,500 pa.
So if James stops work at 65 their income will be $13,000 pa. government super and $7,500 pa. investment income – a total of $20,500 pa or $394 per week – not a lot and not what retirement dreams are made of.
Things will improve in 3 years time when Mary will be entitled to super as well and so their income will then rise to $34,500 pa. – getting closer to what they really need.
James and Mary think they need $35,000 to $40,000 pa to live in moderate comfort.
So if James decides to stop work at 65, their retirement will be very tight because of the very low income, and they will have to consume some of their capital to top up their income. And if they consume some of their savings at the beginning of their retirement, and inflation bites, they will be really struggling by age 75 or so.
- Retire and struggle
- Keep working
- Work part time
- Both work part time
By working 2 years longer, their savings will be larger and their retirement funds will only have to last say 22 years in retirement instead of 25.
In addition they will have more money to spend in that 22 years - in effect two more years working and saving can put them up to 5 years ahead!
Sure it is not ideal but at least there is a solution for them.
How to avoid retirement killer number one
Plan ahead - the sooner the better - and reviewing your affairs annually.
When it comes to advice and reviewing your finances, the focus needs to be primarily on helping you plan, and less on investing your money. Why do I say this? Because some organisations look like advisers, but their real focus is on getting you to invest your money with them.