The problem with retirement planning is that everyone’s lifestyle differs in style and cost. There is no universal amount that needs to be saved by the time you hit retirement to ensure you have saved “enough”. What you need to work out is your own personal number. Then you need to determine if you are going to achieve that number or whether there is going to be a shortfall. If there is a shortfall, you need to decide what you are going to do about it.
You can borrow for many things in life – homes, cars, children’s educations, or university fees – but you cannot borrow to pay for your retirement. To fund your retirement, you need to have saved enough money or be able to earn enough equity to live the lifestyle you enjoy.
How much this is will depend on the lifestyle you want. Let’s keep it simple. Ask yourself the following questions:
- How much do I need each year to be happy with my lifestyle?
- Do I want to be able to travel when I retire? If so, how often, how far and how much will it cost
- What one-off costs will I have after I retire? For example, car replacements, holidays, big dentist bills.
- Do I intend to be mortgage-free when I retire?
- Do I plan to downsize my house around the time I retire (to minimise my mortgage outgoings)
- Do I have a superannuation policy? If so, how much am I likely to receive when I retire?
- Am I likely to get an inheritance?
Downsizing your home and receiving an inheritance both provide one-off income, but it can be tricky to rely on these strategies to save you, because you do not have control over either the amount provided or the timing.
Challenge your assumptions about the things you need now and what you think you will need in the future, and squeeze out frittered expenses to minimise the day-to-day costs of your lifestyle. Understand your annual deficit in retirement to calculate what your retirement will cost and what your shortfall might be. Do it now! Remember, financial success is not about how much money you make, but how much you keep.
Once you have put some numbers to your expected expenses, you can work out what your retirement is going to cost in today’s dollars. If the mere thought of doing this is too hard for you, or you don’t have time to work it out, enlist the help of an expert. This may be your accountant, your financial planner or your Financial Personal Trainer. Multiply this cost by the number of years you might reasonably expect to live after you retire. Add any expected major one-off costs, and subtract any expected one-off cash injections and KiwiSaver payments. This will tell you how much you need to have saved before you reach retirement. Subtract what you have now (excluding your house), and the difference is what you need to save between now and retirement.
The usual goal is to be able to fund your retirement until the age at which you are likely to die, based on general statistics and family history. This can be anything from 65 to 100! I aim for my clients to have sufficient savings to fund their retirement until the age of 90. In order to do this, some people need to buy and hold an investment property, because the funds they have invested in the bank are not giving them the return they need to achieve their retirement goals; they might also invest in other assets that will provide a higher return. Others, where their financial landscape has no tolerance for the risk that accompanies higher returns, must instead alter their lifestyle. The important thing, no matter what their individual circumstances, is that my clients all have clarity around what they are facing and the options available to them.
The gap between where you are now and where you want to be has to be quantified, with a clear plan of attack put in place, otherwise you are not going to successfully sustain your lifestyle after you retire.
Whether you have money to invest, equity to leverage, or both, will refine the investment options available to you.
From Hanna McQueen’s book, “Kill your mortgage and sort your retirement”.