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Jon  M

How much do I need to have saved for retirement?

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Jon M    6

Hi, 

This talk about superannuation age has really got me wondering, how much do I actually need to have saved by 65 or 67 to then comfortably retire?  I've heard some people say $1million or even $2million, but there seem to be a lot of factors that would affect the amount needed. 

- how much will a comfortable life cost in 20yrs time (when I hit 65), what about 40 yrs time and I'm still alive (hopefully)

- will superannuation increase with inflation?

- will my costs of living decrease due to less travelling, entertainment requirements etc

- will my kids need me to help them out with buying a house

- medical costs and rest home fees etc

 

I'm sure there are plenty of other things I havent even thought about.  

What do you think is a minimum amount to save for a comfortable retirement? 

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paul butler    46

no less than 1 million, most won't have that much but that what it should be cause my golden years if i make it that far is going to be one big party mate lol.

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RichLife    47

I suppose everyone defines a comfortable retirement differently. You need to work out how much you want per week and then use something like the Sorted Retirement Planner. I agree that 1 million sounds like a good figure for a comfortable retirement. Generally people want to be able to travel a bit, be able to help out family members in emergencies, eat well, not worry about running the heater in winter etc. The recent Westpac report cites a 400k lump sum (with weekly super on top of that) for a 'choices lifestyle' for a couple in a metropolitan area. I think thats an underestimate, and Super probably shouldn't be relied upon in case its not there anymore when you retire.

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paul butler    46

I just want to be so set up by then aye, so there is freedom to travel, help out the kids, give, and enjoy everything you worked so hard for, my mate is in a hole in aussie, he will be mortgage free in 3 years with not a debt in the world, so it will be so cool, us both rich and just living it up hard out enjoying our lives and time with our whanau.

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James Smith    3

The Retirement Commission suggests people will need 70% of their current income in retirement to sustain their lifestyle. Everyone's situation is different, look at what you earn now and assuming a 5% net return after fees and taxes (very dependent on your investment choice, get good advice in this area)  and you will be on the right path to approximating the amount to save before retirement.

Edited by James Smith
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James Smith    3

Expanded answer: The Retirement Commission suggests people will need 70% of their current income in retirement to sustain their lifestyle. Everyone's situation is different, look at what you earn now and assuming a 5% net return after fees and taxes (very dependent on your investment choice, get good advice in this area)  and you will be on the right path to approximating the amount to save before retirement. For example if you currently earn 80,000 NZD per year the Retirement Commission suggest you will need 56,000 NZD per year in retirement. To earn 56,000 per year the Government does contribute from age 65 (currently, likely to increase to 67) depending on your situation below. For a simple example, a person single living alone, previously on $80,000 per year plus superannuation (20,280 net, see below) you will need $700,000 NZD, by retirement to make up the difference. This may seem like a lot but if you contribute the minimum to KiwiSaver for 45 years you will make it (5% net return, 3% contribution, 3% employer net of esct, 80k income). If you have less time until retirement increase your contributions.  

NZ Superannuation and Veteran's Pension rates at 1 April 2017

Fortnightly payments Before tax Taxed at ‘M’ (if you have no other income)
Single, living alone $900.20 $780.40
Single, sharing $827.20 $720.36
Married, civil union or de facto couple (both partners qualify) $681.60 each $600.30 each
Married, civil union, or de facto couple*
(only one partner qualifies)
$645.56 each $570.56 each
Edited by James Smith
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Hi Jon

Congratulations on asking the right questions with plenty of time to go!

The reality is, the answer to your question is personal to everyone and there's a lot of uncertainty. Anyone who can give you a definitive answer is revealing more about themselves than providing any genuine insight. 

The answer to your question is deeply personal. For example, what is a comfortable retirement for you? 

I know retirees who rely on NZ super and they say they are the most comfortable they've ever been. If my wife and I were in the same position, however, we'd be miserable. For some people, a household income of $30k might be fine. For others, it might be $60k. For others, it might be $120k. This is for you to decide. 

A big part of the equation is that planning for retirement is riddled with uncertainty:

- Who knows what your retirement costs will be? In 20 years' time will the cost of property, transportation, food, and the activities you enjoy bear any resemblance to what they are now? 

(A couple of things worth knowing: retirement villages currently involve an upfront cost in the vicinity of $350-600k (most of which you or your estate will get back after you vacate), plus weekly costs of between $100 and $150; residential care is often $900 to $1k per week, and may be subsidised by the government depending on your means.)  

- Who knows what your health status will be in your retirement and the costs associated? 

A good way of thinking about retirement costs is that they are often "V" shaped. Often, people spend a lot of money at the start of their retirement, whether that be on travel, new cars or toys, or home renovations. Spending typically plateaus, until health issues and dependency take their toll and expenses start to increase again, for example, by paying for residential care. 

There other uncertainties:

- Will you be entitled to superannuation and what will it be? Might it become means-tested in the next 20 years? Who knows the amount you'll receive in 20 years' time? 

- Even if you generate significant wealth, who knows what your investments will return? You can look at historical averages, but the timing of whether you enter retirement in the middle of a bull market or a bear market can have a significant impact on the capital and income you have in retirement. 

I'm not a big fan of rules of thumb that are based on income (eg 70% of current income) because it implies that what you spend should relate to your income. A more accurate benchmark would be against what you spend. Google Mr Money Mustache or the White Coat Investor for some good resources about the value of having a high savings rate. The higher your savings rate, the less you actually need relative to your income (because you're used to spending less). 

Where to from here? 

From a practical perspective, I like the idea of having a simple figure to work towards. For example, a paid off home and $1 million in income generating investment assets by age 65.

This creates a goal to work towards and a benchmark to ensure you're on track. It also makes it easier to decide whether and to what extent you can make other significant financial decisions, such as helping children with buying a house. 

As with any important goal, you also need to question the goal occasionally. Don't just say, "right, a paid-off house and $1 million" and work blindly towards that over the next 20 years. Question it, keep thinking about the underlying assumptions and uncertainties, and let the goal evolve over time, to make it align with your broader circumstances, needs, and objectives. 

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James Smith    3

Hi Sonnie, thanks for the contribution. Do you think there is a shortened version to answer Jon's questions that future users may benefit from? Variability = complexity, perhaps links to appropriate resources... just a thought.

 

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Thanks for the suggestion James. 

Shortened response: There's no one-size-fits-all answer because (1) it's deeply personal in terms of what constitutes a "comfortable retirement" for you, and (2) there's a huge amount of uncertainty about (a) what your needs will be (whether that be because of health, because of uncertainty about what assistance you'll get from the government) and (b) the returns you generate from the amount you accumulate. You should have a goal, but it should be personal to you and you need to realise that no figure will be perfect and may need to change over time. I also suggest benchmarking your goal against spending rather than income - savings rate is incredibly important. 

Some online resources:

* If you want to see just how uncertain your returns will be in retirement, check out http://www.firecalc.com/.

* A couple of good articles on savings rate include:

- Mr Money Mustache's The Shockingly Simple Math Behind Early Retirement" (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) (which at the very least is instructive) 

- The White Coat Investor's "6 Reasons to Have a Highly Early Savings Rate" (http://whitecoatinvestor.com/6-reasons-to-have-a-high-early-savings-rate/)

* Some good calculators online are:

- Sorted.or.nz's retirement planner calculator (https://sorted.org.nz/tools/retirement-planner)

- Vanguard's retirement nest egg calculator (https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

- The Crowdsourced FIRE Simulator (cFIREsim) (http://www.cfiresim.com/ )

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KEZZA    29

Crunched the numbers of retirement last night and broke out in a cold sweat ... because the pressure will be on to invest as much as possible!   Went back to uni (good) and got a student loan (bad - am focusing on killing that debt), then that leaves me 20 or so years to focus on retirement investing.  I looked at what I've earned over the last 5 years from tax records and averaged out my earnings.  I figured well, I can live comfortably on $x, so if I earn over and above that figure (factoring in inflation), then anything over and above that should be considered an investment  for retirement to cover things like travel, increasing health needs (hopefully not but just in case).  Concentrating on paying off the student loan means running a risk, but will mean the pressure's on to save as much as possible.  Budgeting and thinking v carefully before spending will be king now. Have also come up with written goal  (specific amount) to work towards - because written goals seem to work(!)   

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RichLife    47

Remember that the real value of the money you earn right now is higher than the money you will earn further down the track (due to inflation, and also due to compounding returns on investments) - so if you only trickle out the minimum repayments for your student loan, while investing the extra you would have paid back above the minimum, you will actually come out better off. Some people can't handle any debt on the books which is fine (we're all different), but it's interest free so it doesn't have to haunt you like other forms of debt. The psychological boost of focusing on investing now, and trickling away your SL over the longest term possible, might be enough to offset the worry of having a debt. Just my 2 cents.

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I agree with RichLife - it's worth considering whether paying off your student loan should be the priority. Repaying debt is generally a good idea, and the higher the interest rate is the better. (Avoiding unnecessary debt is also a good thing.) Chances are that you live in NZ and you're not paying any interest on your student loan balance. If you die the debt will be extinguished. It's about the best possible debt you could have, so why be in a hurry to repay it, and why not funnel your funds elsewhere?

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KEZZA    29

Yeah, good  point.  It's my last debt and I want it gone.  Am concerned that govt may reintroduce interest on student loans (Productivity Commission has been bleating on about it).  Will avoid borrowing money again in future - don't like being a slave to a lender - when I signed the contract to say I'd pay it back, then yeah, will pay it back.  Goal to be debt free by 50 - lofty, but hopefully do-able.

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RichLife    47

You definitely won't regret paying it off early! Regarding re-introduction of interest onto student loans - I would expect that such a policy would only introduce interest for new loans taken out after the legislation is passed. I think it would be unlikely the govt would retroactively add interest back on to existing loans (probably way too much for their awful IT infrastructure to handle).

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Tina    20
On ‎24‎/‎03‎/‎2017 at 8:36 AM, Jon M said:

Hi, 

This talk about superannuation age has really got me wondering, how much do I actually need to have saved by 65 or 67 to then comfortably retire?  I've heard some people say $1million or even $2million, but there seem to be a lot of factors that would affect the amount needed. 

- how much will a comfortable life cost in 20yrs time (when I hit 65), what about 40 yrs time and I'm still alive (hopefully)

- will superannuation increase with inflation?

- will my costs of living decrease due to less travelling, entertainment requirements etc

- will my kids need me to help them out with buying a house

- medical costs and rest home fees etc

 

I'm sure there are plenty of other things I havent even thought about.  

What do you think is a minimum amount to save for a comfortable retirement? 

Hi I took a few weeks off and did a trial retirement. I had saved a bit of money and created a "pension fund" which where my super payments of $780/fortnight came from. Than my "kiwisaver' ACCOUNT  will give me based on sorted calculator $300/fortnight. I have a few years to go before my house is paid off but i think of mortgage payments as maintenance and other bills for this scenario. On paper, I would need $1000 fortnightly to live comfortably  as i will own my own home. 

Week one: mostly stayed home, watched sky, gardening etc. result : in budget

Week Two and three : road trip to lower North Island mostly camping, backpackers and odd jobs on farms for free board and meals. Result: in budget

Week four: return to Auckland, down with flu, sick and doctors bills. repairs on car and house. Result: way over budget.

Week Five: Back to work:(

Conclusion: retirement Budget needed $1500 fortnightly to factor in unforseen circumstances and overseas Travel.

Next trial in 4 years.

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Ford    12

I worked out a retirement budget on a spreadsheet

I am 50. I worked out I will likely retire at 65 then I assumed I would live for another 10 years after retirement, so I need to earn 10 years income in the time I have left to work, which is 15 years.

I worked out my basic living costs per month then x12 to work out how much living is for the year.

I guessed I would need about 5 cars for the rest of my life (now until 75years I buy secondhand). Because I do my budget for a year I don't factor in vehicle replacement, but I probably should.

But for the retirement budget I just added the price of five cars to the figure.

I then worked out how much I needed to live on for 10yrs which for me is around $250,000 and which I would need to earn over the remaining working years of 15

That gave me an annual income and I worked that back to a rough weekly figure of $300 net per week I need to generate in cash over and above my current income I'm earning to support my retirement.

I have 25yrs to go until I get to 75yrs (end of life)

Approx $600,000 total income it will cost to support my current lifestyle to the age of 75yrs

I did not factor in any pension.

 

 

Edited by Ford

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