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Retirement Scenarios

"The best way to predict your future is to create it"Abraham Lincoln

The majority of New Zealanders retire when they are eligible to receive New Zealand superannuation at age 65[1].   This benefit will provide a single person, living alone, an after tax income of $345 per week.  A qualifying couple will be paid an after tax income of $576 per week.

Most New Zealanders do not reach retirement in the financial position they expected.

 

For every 100 people who entered the workforce 45 years ago

  • 1 is rich
  • 16 are financially independent but not rich
  • 5 are still working
  • 20 have died
  • 58 are totally dependent on NZ Super


New Zealanders are living longer; life expectancy has risen 6 months each decade since 1945.

The number of people aged over 65 will make up nearly 1/5 of New Zealand's population by 2031. Advances in medical science and improving standards of living means a child born today could live up to age 130. It is prudent, therefore, to assume a minimum life expectancy of at least 90 when calculating your retirement income. What is your life expectancy?

How Much Do You Need to Save?

To work out how much you need to be saving look at our retirement savings calculator.
 

 

Three scenarios for retirement income.

 

Scenario one: Working professional couple, combined after tax family income $200,000 p.a. mortgage free house.

This couple enjoys their lifestyle which involves overseas holidays, visiting their family, distributing income to their children, replacing their cars and redecorating their house when they feel like it without being concerned about the affordability.
 
They have enjoyed the last ten years of earning more money than they needed and have saved $1,300,000.

The couple cannot imagine living off less than $200,000 p.a. They want a realistic retirement income and want their assets to last for as long as they do.  They are prepared to reduce their expenditure to $150,000 p.a.

Assumptions:
  • After tax investment return 4%
  • Inflation 2%
  • Money required to age 93 (for youngest partner) = 28 years.
  • When their money runs out at age 93 they will either sell their home and move into a rest home, or, they’ll purchase a reverse mortgage that will enable them to continue to live in their family home.
Will $1,300,000 be enough?

No.  Based on the above assumptions their money will have run out in eleven years.

They want an after tax weekly income of $2,885 inclusive of $592 per week (after tax) of NZ super.  This represents a 25% reduction of their pre-retirement income.

If they want their retirement savings to last until the youngest partner is 93 they will be only able to live off an income of $70,000 p.a.  This is only 35% of their pre-retirement income.

Scenario two: Health issues


This couple has always lived modestly.  They each have various health issues and they expect that one or both of them will need to move into a rest home about ten to fifteen years after they retire.

Their after tax income is $120,000 p.a and believe they can live off $50,000 p.a. (inclusive of NZ Super).  They have a mortgage free home.  They have retirement savings of $300,000.
 
Will $300,000 be enough?

No. Based on the above assumptions their money will not last.  They will receive $23,755 from NZ Super and the investments will generate an additional $17,000 p.a.  Their total retirement income will only be $41,000 which, like the couple in the first scenario, is only 35% of their pre-disability after tax income.

But.  If they need to move into a rest home a portion of their investment monies will be used to pay for some of the rest home fees.  It will be difficult for the well spouse to manage financially.

 
What does this mean for the couple in scenario 2?

The couple were managing to live cautiously on 35% of their pre-retirement incomes.  Their total retirement income was $41,000.  They had curbed their life style spending, were unable to replace their car or replace the roof on their house which they had been advised to do but they were getting by.  Six years into their retirement their investment income had diminished to $262,000.

That is $42,000 too much to entitle the unwell spouse to the Residential Care Subsidy.  They will not be entitled to a rest home subsidy until the $42,000 has been used up.

The well spouse wishes to continue to live in their family home but the NZ super payment will be reduced to $385 per week.  The remaining funds of $220,000 can be invested and would provide an income of $14,500 p.a.

The total household annual income for the well spouse has decreased overnight from $41,000 to $34,500.  Very little has changed.  Several years earlier the unwell partner had lost interest in  shopping or travelling and ate very little.  The costs for maintenance and the replacement of cars, white-ware and holidays had become unaffordable. In addition their property had increased significantly in value so their rates were also becoming unaffordable.
 

Scenario 3:  A couple recently sold their family business for $1,500,000 and had additional savings of $1,000,000

They invested $2,500,000 which provided them with additional income to NZ Superannuation of $144,000 p.a.

Their total income is $168,000.  They like their family home and can afford to continue to live in it throughout their retirement.  They don’t travel as much as they used to and enjoy giving some of their annual income to their children.

This couple is financially secure and out of the three scenarios they are the only ones who feel satisfied with their retirement lifestyle.  The only bothersome issue is that most of their friends failed to provide for their retirement so they feel a little isolated.  Every time they ask friends to travel with them or out to lunch or dinner they are turned down because their friends cannot afford to live a lifestyle that involves dining out or travelling.

 

One of the biggest mistakes a business owner can make

A business owner had worked closely with his accountant and business adviser for many years and intended to sell his business for more than $2,500,000.  This was always a realistic plan but when it was time for him to sell there were no buyers.  The business was almost given away for $1,500,000.  It is normal for business owners to overvalue their businesses.  Formulas and assumptions vary and ultimately a business is only worth what a buyer is prepared to pay for it.  Business owners should diversify and save for their retirement in other areas outside their business.

Retirement Trend in the US

Where you can afford it savings towards retirement could include the cost of a live-in nurse so that you do not need to go to a retirement home.

 
[1] To qualify for NZ Superannuation you must:
  • Be aged 65
  • Be a NZ Citizen or a Permanent Resident
  • Live in NZ at the time you apply
  • Have lived in NZ for at least ten years since you turned 20.  Five of those years must be since you turned 50.