Retirement is not just about savings and investments. There are other aspects to think about, many of which will affect financial planning for retirement in some way. In part two of our examination of the 2021 Retirement Expenditure Guidelines, Financial Advice New Zealand chief executive Katrina Shanks examines some of those options.
OPINION: Many of the numbers in Massey University’s Fin-Ed Centre’s 2021 New Zealand Retirement Expenditure Guidelines, published in association with Financial Advice NZ and Consilium, threw up some stark, even frightening, facts for pre-retirees to have a hard think about.
The rate at which inflation can add to household expenditure in just one year.
The huge shortfall between NZ Super rates and expenditure: $167 per week for one person living in the provinces (No Frills expenditure), and $798 for two people in the city (Choices expenditure).
The lump sums needed at retirement to fund spending over and above NZ Super: $170,000 for that one person above, and $809,000 for those two people.
Weekly savings required to achieve those lump sums: $185 if starting at age 50, and $47 if starting at 25; and $917 for our couple starting at age 50, and $251 if starting at 25.
But it doesn’t have to be frightening because, as the guidelines say, there are other options to consider that will directly or indirectly affect financial planning for retirement.
The guidelines point out that though they talked about expenditure by currently retired households, no two households are the same, so it’s a good idea to look at your own pre-retirement expenditure and think about how it will change in retirement.
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That’s what a financial adviser would tell you, and that’s the beginning of your planning.
Assuming you have established your savings habits – perhaps along the lines outlined above as they apply to your situation and requirements in retirement, and preferably as early as possible – your next move is budgeting or tracking your spending, or both.
Doing either budgeting or tracking will allow you to better estimate your likely expenditure in retirement, “and will have the added benefit of possibly identifying current areas of expenditure that could be reduced to assist in achieving your retirement goal”.
This is probably when outside advice can be of most help. There are many ways you can make small changes to your financial behaviour that can have a big impact on your ability to save now.
The guidelines say reviewing life insurance arrangements is an important thing to do upon reaching retirement. For example, if you no longer have dependents and are debt-free, do you still need it? If you decide you still need it, how much cover do you need?
They also suggest reviewing your health insurance. While many elderly people lead very healthy lives, others have health issues that come at a time in their lives when health insurance generally becomes more expensive. Your planning may need to factor in either how you will fund that increasing cost of insurance or whether you don’t want to rely on the public system and can self-insure.
The guidelines refer to living arrangements as “a substantial matter” to consider in retirement.
In its 2020 report, Massey’s Fin-Ed Centre looked at the difference between living in your own home and renting. It found renting required weekly savings of $245-$420 per week from age 50 or $80-$135 from age 25 over and above the savings you need to fund the difference between your expenditure and your Super.
These are big numbers and further illustrate the importance of both owning a home and saving early.
This year’s report acknowledges this is only part of the question. It asks if you own your own home, will you continue living in it and for how long. And if you are likely to move closer to family, do you have the funds to buy perhaps in a more expensive area. Or staying where you are and downsizing to free-up capital to generate income.
Other options include moving into a retirement village (where financial arrangements are more complex and vary greatly), or a rest home (if you need residential care, and for which you could be eligible for a government subsidy).
The guidelines make the point that, “Anecdotally, those who choose to downsize or move to other accommodation options, such as rest homes, often leave it later than is ideal.”
They also say it’s important to consider how your partner status may change: if you’re currently partnered, what difference will it make for you if your partner dies? Would your plans to remain in your existing home or to relocate change?
These are all good questions, and as we get older it’s harder to have these conversations so they often get put in the too-hard basket. So, there’s no time like the present to have the chat.
It’s important to think about what you’re going to do with the time you have once you retire and the costs of that.
The guidelines point out that while the cost of staying home and doing things such as reading and gardening may not be great, buying plants can be. Similarly, though getting involved in community organisations as a volunteer may involve minimal cost, sometimes that cost can be greater than you expect. And most recreational activities have costs, both for equipment and going membership fees.
If travelling is in your plans, do you need to think about funding the purchase of a campervan, or if you have family overseas will you have to factor in that travel?
These are all little extras that can add up into a reasonable expense unless you plan for them early.
Looking at your pre-retirement expenditure to think about how it will change in retirement is vital to how comfortably you will be able to live.
Budgeting is the first and most obvious step, but aspects such as the cost of life and health insurance, living arrangements, and retirement activities should be factored in if you are to cover as many bases as possible so you don’t be surprised.
Once you have this figure as a target then the next step is to work out how to get there. Don’t be one of those people sleepwalking into retirement – plan now and give yourself the peace of mind that you have your retirement covered.
As always, it’s always sensible to seek further advice, preferably from a professional.
In part three: A case study of retirement options for a 25-year-old on a salary of $50,000.