A no frills or no regrets retirement – what’s it going to cost you?

Have you thought about what it might cost to live in retirement?

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08 August, 2017

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When the weather is as wet and miserable as it has been over the last couple of months, it's easy to find yourself drifting off and thinking about escaping to somewhere warm, soaking up some sun and lolling about by the pool. If only we had the freedom to escape on a whim.

Isn't that what retirement is meant to be like? Now you've stopped working, you've got all of this extra time to do as you please and tick off the bucket list. Whether it's more travel, indulging in a new passion, buying that classic car or something else.

Of course, with more time at your disposal there's every chance you can spend more money than you did when your days were full working.

Running out of money in retirement is a real fear for many people and it has a big impact on their behaviour. More Kiwis are working past 65 than ever before; some scrimp and save on every penny, others take on more risk hoping to generate the extra income they need.

So what is retirement going to cost you? Well, it really depends on whether your taste is more baked beans or caviar, and what part of the country you live in.

Westpac Massey University Fin-Ed Centre has just released its fifth update to the New Zealand Retirement Expenditure Guidelines. These are based upon actual levels of spending in retired households as determined from the Household Economic Survey.

The report provides two sets of guidelines. The No Frills guidelines reflect a basic standard of living that includes few, if any, luxuries. The Choices guidelines represent a more comfortable standard of living, which includes some luxuries or treats.

The following table summarises the weekly living costs of a typical two person household (excluding accommodation costs).

  2016 NZ Super Gap
No frills — Metro $526.58 $591.94 N/A
No frills — Provincial $679.50 -$87.56
Choices — Metro $1,095.20 -$503.26
Choices — Provincial $1,010.95 -$419.01

Only the no frills — Metro group's weekly costs are covered by the weekly New Zealand Superannuation payment — $591.94 per week at time of report writing — since increased to $600.30 from 1 April 2017. Everyone else needs income from other sources to bridge the gap.

While at first glance, the lump sum payments you would need at retirement to fund the difference between NZ Super and the Retirement Expenditure Guidelines might look a little eye watering (see table below), if you have time on your side, you can realistically save these sums.

  Weekly Gap Savings required Weekly Savings
(if starting at age 50)
No frills — Metro N/A Nil Nil
No frills — Provincial -$87.56 $78,144 $98
Choices — Metro -$503.26 $486,023 $608
Choices — Provincial -$419.01 $402,682 $504

Starting earlier substantially assists the level of savings required. For example, if a couple starts to save at age 40 the weekly savings required to achieve the lump sum of $402,682 for a Choices — Provincial Two-person Household reduces to $286 per week.

KiwiSaver is obviously a great help in this regard with the turbo boost from employer and government contributions. A person earning the median weekly wage of $937 in 2016 and making the minimum contribution of 3%, and receiving the employer contribution of 3%, could expect to save $58,974 if starting at age 50. Starting at age 40, the expected KiwiSaver savings would be $117,500.

So on the next rainy day instead of dreaming about tropical island getaways, spend five minutes crunching what your retirement numbers look like.

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