Current NZ superannuation payments per couple are $536.80 a week, those reliant on just this ( 20 per cent of all retirees) would find their retirement years many not be that golden, with takeaways and restaurant meals a rarity, and overseas trips off the cards.
That's the finding of the inaugural Retirement Expenditure Survey.
A Simple 7 Step Process for Retirement Planning
Step 1: What do you want?
The first step in retirement planning is deciding on your vision for retirement. Do you want to travel the world, travel the country in a motor-home, or stay at home to read novels and play cards? Your vision of retirement is the necessary starting point because it will determine how much your retirement will cost. You need to have at least a rough outline for your dream life in retirement or you won’t be able to complete the following steps which incorporate budgeting and planning.
Step 2: When will you retire?
Once you have a picture in your head of your ideal retirement it is time to pick a date when you will start living it. The reason this step is essential is because your superannuation may or may not be available to you then. Additionally, the number of years you have to build your savings and the number of years your existing savings can continue growing will depend on this retirement date.
Step 3: Estimate what it will cost
Now that you have a dream vision for retirement and a date to start, it’s time to estimate what you will need and likely revenue streams to see if you will have enough money. The first step in this process is to guesstimate how much your plans for retirement will cost – i.e. make a budget. It will help immensely if you know what your current lifestyle costs.
Be overly generous in your estimates because inflation and all the stuff you inevitably forget to include will cause you to underestimate anyway.
Another way is to decide what weekly income in the hand you would need and go from there.
Step 4: Estimate capital required and likely returns on these investments
So say you wanted $750 a week in the hand to cover the lifestyle you wanted, this is $39,000 pa.
If we worked on a very safe return of 3% then you would need to have capital of $1,300,000 (ignoring tax and your home)
If the return was 4% you would only need $975k, 5% $780k and 6% only $650k
Based on this step, you now have a savings goal to achieve by your retirement date. All that’s left to do is build a savings plan to achieve it.
Step 5: Build a savings plan
This starts with getting into a super scheme, if you haven’t already, Kiwi saver is the obvious one. But there is a choice of providers and also a choice of schemes, so make sure you take professional advice to ensure you are with the right one and in the right scheme.
You can rely on what you can save alone, with compounding interest or you may prefer to use leverage (debt) and borrow to invest in property, shares or other assets to accelerate your capital growth.
Seeking professional advice in helping with spreading the risk, balancing the returns from income and capital gains is strongly recommended.
NB: Try not to raid the pantry either.
Step 6: Using tax efficiency
If you have debt that is not tax deductible, say the loan to buy your house, car, holiday etc then it makes sense to concentrate on clearing these as fast as possible. Debt taken on to create wealth and producing (or having the potential to produce) taxable income should be the last debt cleared. In the past some lenders have allowed interest on these loans to be capitalised, thus freeing up cash flow to non-deductible debt.
Understanding the tax rates and tiers is also important, as are the entities and people involved. Again it is prudent to seek professional advice
Step 7: Begin Now
Procrastination is the mountain you have to overcome. Simple delay destroys more plans for retirement than all other causes combined.
Time in the market allows compounding to work for you, one day lost is never regained so begin now.
That’s it! Retirement planning explained simply.
But please note:
Wealth is just part of the retirement picture so invest in your health so you are capable of enjoying your planned retirement.
We are living life so not all our focus should be on the end game and buying a home to enjoy and accommodate your family needs may take precedence, in the end though your home is a store of capital which can be released later.
Finally I would like to remind you, the richest person in the cemetery loses.
Prepared & written by David Weusten, who has over 38 years’ experience in the finance industry, both in NZ and overseas. He is a Registered Financial Advisor, a Budget Advisor and a Business Mentor.
He has been published in the Sunday Star Times, The Press, the New Zealand Franchise Magazine and RD1.com. He has also published business guides “What do banks want? So you can get what you want”, and “Owning your own business, an overview of what to consider” and also a money management guide targeting our youth called, “Money, Your Master? Your Slave? Your Choice!”