Have you been holding off planning your retirement, treating it much like an unpleasant chore you’ll get to one day? Or, are you young enough to think that retirement is a ‘future-me’ problem – something you’ve got plenty of time to sort out once you’re a bit older?
When we’re young, retirement does feel like an age away. Even when we’re a bit older, the idea of retirement can be quite daunting. Not working, not earning… It’s not just a case of what you’ll do with all this free time, but how will you fund it?
Because the reality is you will need money during retirement. How much you need will depend on what your retirement dreams are – whether that’s curling up in a sunny spot to finally catch up on that reading list, or cruising around the world on your private yacht.
How then do you ensure you have enough money to live the retirement of your dreams?
Step 1 – calculate how much money you’ll need during retirement.
The first step is to figure out how much money you’ll need. If this is you trying to figure this out, you’re not alone.
However, there are some assumptions you can make to get at least a vague idea.
To figure out what your number would look like first calculate how much you’re spending to live your life each year (this is your current after-tax income minus what you’re putting into savings)s. Whatever figure you’re left with, times it by 25.
If your yearly expenditure as a couple was $100,000, for example, you’d need about $2.5m to get you through those 25 retirement years.
There are of course some limitations to this formula. It doesn’t account for inflation, and it doesn’t necessarily account for the extra activities (like sailing around the world) that you may want to do. It also assumes that you’ll only live for approximately 25 years after you retire, when you may in fact live much longer. On the other hand, if you own your own home, you’ll (hopefully) have paid off your mortgage by the time you retire, so that would no longer be a cost you have to worry about.
Imperfect or otherwise, this figure is still a good starting point and provides at least a starting point of what you’ll need during retirement.
Step 2 – figure out how much you’re on track to have
Once you have a rough idea of what number you should be aiming for, you can start looking at what you’re on track to have. So, look at how much you’re saving each year and times that by how many years until you plan to retire. Look at your KiwiSaver – your yearly statement will show how much you’re on track to have by age 65 based on your balance, contributions, how many years until retirement, fund choice and rate of return.
Then, if you have a mortgage, multiply your yearly mortgage repayments by how many years you’ll be mortgage free before retirement, as this amount can be added to your savings figure. If you have other investments – especially reasonably steady ones like a managed fund that you’re not planning on touching until retirement, you can add that to these calculations as well.
Don’t forget to take New Zealand superannuation into account (if you’re eligible). Currently, the New Zealand Government will pay a single person about $24k per year (or $600,000 over 25 years), and a couple living together (who both qualify) about $37k per year (or $925,000 over 25 years).
Step 3 – Calculate what’s missing and how to close that gap
Now that you have some idea of both what you’ll need during retirement and what you’re set to have, you’ll be able to calculate what the gap is between those two and start looking at ways the close it.
This could include finding ways to pay off your mortgage faster – not only will this save you on interest repayments, the longer you have between being mortgage free and retiring, the longer you have to put that money away towards your retirement funds.
However, in some situations, putting all your money towards paying off your mortgage could leave you worse off – especially if you have no other investments or savings.
Now’s also the time to start looking into other investment options if you haven’t already – either with property investment or through another avenue, like managed funds. Maybe even both. The route you take may depend on how long you’ve got till retirement, your ability to leverage, and your risk requirement.
Step 4 – keep in mind what not to do
While we’ve talked about the things you should be doing to get to a retirement you will enjoy, we also need to take a moment to talk about what you shouldn’t do.
You don’t want to rely on downsizing or selling your home as the sole way to fund your retirement. Often, this only equates to covering about 3 years of your retirement costs as a large chunk of the value of that home will go towards acquiring a new one.
Don’t set and forget. While KiwiSaver, other investments, and savings accounts are useful tools in preparing for your retirement, it’s important to keep an eye on their performance to ensure you’re getting the best returns possible. Are you in the right KiwiSaver account for your life stage and are you contributing enough to benefit from the government subsidy? Could your savings be put into a higher interest account or term deposit, or be put towards an investment? And talking about investments, are they diversified and at a suitable risk level?
Finally, don’t be afraid to ask for help. There’s a lot to consider and plenty of variables to make it tempting for retirement to become a future-you problem, rather than something you should start tackling today.
If you have questions about preparing for your retirement – whether it’s one with all the mod-cons and luxuries, or just one where you can enjoy the occasional treat – enable.me is here to help.
If you would like some expert advice on what your retirement figure might be, how much you’re on track to have, and how you can close any gap there may be, book a consultation with an enable.me coach today. They can help you determine where you’re at and coach you through the steps so you can live out your retirement in comfort.