The modern mantra suggests you need $1 million to comfortably retire, but experts say it’s not quite that simple.
How much money do you need for a comfortable(ish) retirement, and is it really $1 million as is often thrown around? No... but it’s complicated.
It depends on how long you live, and whether you plan to sun yourself in the Greek islands, go shopping on Fifth Avenue, or hunker down in a backwoods hut with your own food supply.
Wellington trusted adviser Malcolm Dixon is not convinced the $1m figure is useful. In fact, it could act as a deterrent to even trying to save for retirement, he suggests to the Sunday Star-Times.
“One million certainly is a nice round figure and for many it is the ultimate goal; but is it realistic, does it put people off retirement planning? I think we all know the answers to these questions,” he says.
“Every retirement calculation will be different.”
Dixon usually excludes lifestyle assets such as a mortgage-free home, caravan, boat and so on from all calculations, confining them to cash and liquid investments.
At the most simple level the sum of money you have when you retire can be divided by the number of years you expect to live.
If you retire at 65 with $1m and plan to live until 85, that’s $50,000 a year to get by on, not counting superannuation. But if you go on until 95, hasty recalculations will be required.
On average, 80% of 65-year-old men can now expect to live until they're 90. For women, 80% of those who reach 65 will live until they are 94.
Another way is to spend 4% of your nest egg each year but increase it with inflation, so it lasts 30 years (with interest taken into account).
Massey University’s weekly retirement expenditure guidelines (the latest is 2022-2023), are a solid starting point in a fluid environment in which house, petrol and cost of living prices vary.
No Frills, single: metro $826.26, provincial $689.54; two-person, metro $982.02, provincial $849.82.
Choices, single: metro $1163.09, provincial $1263.35; two-person, metro $1665.85, provincial $1330.30.
For all groups, the average household spends more than they receive from NZ Super, $519 a week after tax for a single person - or two lots of just $400 for a couple.
First, set your objectives and expectations, either as an individual or with your partner, and consult someone qualified to run the numbers, Dixon says.
Plan for a realistic lifestyle, have realistic savings targets, and realistic plans about working beyond 65. Are you a one or two-person household? Will you live (cheaper) provincially or in a city?
“Most importantly, would you like to budget for a ‘no frills’ or ‘choices’ lifestyle? There will be others planning for a luxury retirement, $1 million will not be enough for them.”
Retirement Commissioner Jane Wrightson highlighted the calculator at sorted.org.nz which offers figures of how much will need to be saved, based on what retirees are currently spending.
Get saving, she urges.
“It pays to start planning for retirement as early as possible. How much you need to save will depend on your own circumstances, but the sooner you start, the better the position you’ll be in when you stop working.
"While NZ Super [the government pension] can help get you by, it's your own savings and investments that will help to make retirement more comfortable and enjoyable.”
“One thing we have found is that there's plenty of support, info and tools around accumulating retirement savings but not much about decumulating once you're in retirement.”
Some will be afraid to spend their retirement nest eggs at all, others might spend more heavily in the early years of retirement, when they are in better health and more mobile.
In March, Sorted will release a tool to help plan this spending, but would also recommend seeking financial advice.
Retirement should not be dictated in a set-in-concrete plan, Dixon says.
“I’d encourage you to start (or end) with living to 95. In some cases, including my own, health scares might suggest a shorter life expectancy, so some fine-tuning is always an option – recognising if you beat the odds there will be implications.
“The key word is planning, it's not a one-off! You should plan to review and monitor progress annually.”
Market conditions can change and affect your plan, your health could change, and so can your expectations, he says.
“Spending time reviewing your plan is useful and a valuable investment in yourself.”
Nor is Philip Morgan Rees, wealth management head at Milford Asset Management, locked into the $1m figure.
“It really depends on your needs, your spending and your asset base. It also depends on whether you work part-time or not (semi-retired),” he says.
New Zealand has a high percentage of those aged 65-69 still in work. Each year you work on is one less that needs to be funded when you do retire.
Morgan Rees says the best place to start is to identify what you are likely to spend in retirement.
“One rule of thumb is to use the so-called 4% rule and work back from there… If I need $40,000 per annum on top of New Zealand Superannuation, then a million dollars is a starting point.
“That said, it’s perfectly reasonable to erode your $1m capital over your retirement. After all it’s your money, but you don’t want to run out before time.”
Stats NZ offers a “How long will I live” calculator, based on averages.
“Take a spread of ages which could apply to you and run some cashflow modelling for the options you select to see what your variables may be and how much money you need to achieve them,” he says.
Morgan Rees advocates talking to an adviser to plan the amount of retirement income you need, and how to meet that need.
“For many clients their spending patterns are different across different period in retirement,” he says.
Spending is often higher in the early years where retirees are more active, settles down in the mid years and rises again in the later years, due to care and health costs.
“You’ll want to have money available when you want to (liquidity) so that needs to be part of your plan, for example what if home improvements or other large expenditure is needed,” he says.
“Investing in retirement can be different too. Generally, we become more risk-averse when we are using up our assets and our capacity for risk falls.”
Working with an adviser can help manage the uncertainty of longevity risk, market risk, liquidity risk and inflation risk, Morgan Rees says.
In his book Cracking Open the Nest Egg, financial author Martin Hawes goes in the other direction, offering retirement spending options.
It’s complex, and easy to get wrong, he has said.
‘‘Most people die with more left than they were thinking, and they’ve therefore left some of their money on the table, and some of their lifestyle on the table.
‘‘Most people underspend, and therefore they under live; whether that’s travel domestically or internationally, or the things that they want or the things that they want to do.’’
Save or spend, that is the question.