26 October 2022

    Achieving your dream retirement

    Chris Waters

    Senior Investment Analyst

    Email Chris
    Chris Waters

    Senior Investment Analyst

    Email Chris

    How much do you need to save to achieve your dream retirement? In part two of this series, we reflect on the findings of the recent Massey University Retirement Survey and what you should be doing to meet your retirement investment goals.

    Last month, we discussed some of the key findings from the Massey University survey of retirement spending. The main takeaway was that the government superannuation will not be enough for even a basic ‘No-Frills’ retirement, which means households will either need other savings or to work part-time to meet their retirement living costs.

    Today, we look at what how much you need to save and how to best achieve your retirement goals.

    How much do I need to save for retirement?

    The study states that a two-person household in a metro location would need to save $191,000 for a No-Frills lifestyle in their retirement, or $755,000 for a Choices lifestyle.

    As a reminder:

    • a No Frills lifestyle reflects a basic standard of living that includes few, if any, luxuries (based on the average expenditure of the second quintile of retired households); and

    • a Choices lifestyle that represents a more comfortable standard of living, which includes some luxuries or treats (based on the fourth quintile).

    Source: Massey University NZ Fin-Ed Centre New Zealand Retirement Expenditure Guidelines

    There are a few things to highlight.

    • Firstly, this assumes you are retiring today. For those who are further away from retirement, these figures will increase as inflation drives living costs higher. For example, a two-person household retiring in 15 years would need $257,000 at that point for a No-Frills lifestyle versus $191,000 if they retired today, based on 2% inflation.

    • Secondly, these figures are for two-person households. The corresponding figures for a one-person household are $277,000 (No Frills) and $561,000 (Choices), reflecting the real challenges in retirement for single people.

    • Lastly, these amounts assume that all savings will be spent by year 25 of retirement. For those wanting to leave something behind for the family beyond the family home, the amount saved would need to be higher (or the level of spending in retirement reduced).

    So how do I go about saving this money?

    For all but a few, savings alone won’t be enough, especially as inflation eats into spending power. Your savings will need to be invested to generate sufficient returns to achieve your goals. The need to invest these funds does not stop once you retire. You need to ensure your investment continues to work hard for you even in retirement, to keep ahead of inflation and ensure your nest-egg lasts.

    Here’s the amounts a two-income household that started investing into a balanced fund from age 35, would need to save between them:

    Source: Fisher Funds (based on assumptions set out in Government regulations)

    Both these figures are in today’s dollars and would need to increase in line with inflation*.

    If you are just putting the minimum 3% of your income into your retirement investment, this may not be enough based on the assumptions above. All else being equal, and without reducing your retirement spending – you will need to save more.

    * These figures were calculated using the Fisher Funds retirement savings calculator found on our website.

    Small changes can help you achieve your retirement goals

    While this could seem daunting to some, there are actions you can take to help you achieve the retirement you want. These small changes can make a large difference.

    Firstly – make sure you are in the right fund for your investment time horizon. These calculations assume that savings are invested in a balanced fund (using the expected investment return assumptions set out in Government regulations). You can see the difference your choice of fund makes.

    Graph showing weekly contributions for a two person household contributing to a balanced fund versus a growth fund and conservative fund

    Source: Fisher Funds (based on assumptions set out in Government regulations)

    If you have a long-enough time horizon, and all else being equal, you are better off in a growth fund.

    For those that qualify, KiwiSaver is a great investment option. The government contribution and employer contribution (for those that are employed) can make a big difference in you reaching your investment goals.

    Secondly, time horizon matters. The earlier you start saving and investing, the less you need to put aside each week to meet your savings goal as the power of compounding does its work for you. The calculations above assume the household starts saving for retirement at age 35 but starting earlier can make a big difference.

    Graph of combined weekly savings for a two person household contributing to a balanced fund starting contributing at ages 30, 35 and 50

    Source: Fisher Funds (based on assumptions set out in Government regulations)

    Finally, owning a mortgage-free property helps in retirement, and can provide additional funds if you choose to downsize. This is not a free lunch, however. The flipside is the higher cost of servicing the mortgage could reduce your ability to save for your retirement today. The estimated monthly mortgage payment on the median New Zealand house with a 20% deposit is currently $3,700 or 49% of median household income). The ideal solution is to pay off the mortgage and invest for your retirement at the same time. Paying off the mortgage should not be your only retirement plan.

    Benefits of financial planning

    Having a plan for retirement is crucial. Understanding what kind of retirement you want, and how much you need to save to achieve your retirement goals is a core part of any plan.

    There are ways you can help yourself achieve your dream retirement – save more, start earlier, and invest in the appropriate fund for your investment time horizon.

    If you would like to talk to someone about your retirement goals and how you can reach them, the team at Fisher Funds are here to help. Please contact us or get in touch with your adviser.