Source: Radio New Zealand
One expert says there’s a meaningful gap between a basic and a more comfortable retirement. 123.rf
You’ve probably heard warnings about how New Zealanders are likely to need to work until later in life.
Treasury has pointed out the pressure an ageing population will put on the country’s finances – and the message was repeated at last week’s University of Waikato economic forum by Milford Asset Management.
But what if you’re having none of that, and actually want to retire early?
It’s not impossible, but might require a bit of planning.
How much do you need?
One way to retire is to amass a significant enough sum of money that you can tap into a bit of it each year to replace your income.
This is what most people are already planning to do with KiwiSaver – but if you’re retiring early, your amount may need to be larger because you won’t have the support of NZ Super until you are 65.
Koura founder Rupert Carlyon said people should figure out what they were spending money on at present and which expenses might stop if they stopped working. Then they would need to think about additional things they might start spending money on.
Once you know what you need to be able to pay for each week, you can work backwards to determine what lump sum you need to generate sufficient income to cover that.
He said it would work for most people to draw down 4 percent of the value of their investment portfolio each year.
“The amount you need is going to be quite a lot … basically for simplicity’s sake, you kind of times [your income] by 20. If I’m saying I want $100,000 a year to live off for the rest of my life, I’m going to times that by 20, and that’s about my number.”
That calculation would mean that someone wanting $100,000 a year would need to have $2 million saved. But that does not account for NZ Super being available from 65, which would provide a portion of the $100,000 annual income.
Ana-Marie Lockyer, chief executive at Pie Funds, said based on a “no frills lifestyle” as described by Massey University’s Retirement Expenditure Guidelines, someone would need about $350,000 to $500,000 if they wanted to retire at 60 and about $550,000 to $700,000 if they wanted to retire at 55.
“These are indicative figures and assume you own your home mortgage-free. Home ownership makes a significant difference. If you’re still carrying a mortgage or renting, the amount required increases substantially.
“Lifestyle expectations also matter – there’s a meaningful gap between a basic and a more comfortable retirement. Location plays a role too, with Auckland, Wellington and Christchurch generally more expensive than provincial areas.”
Pie Funds chief executive Ana-Marie Lockyer. Supplied / Pie Funds
Other people might live off the income their investments generated, such as rental properties.
Investment coach Steve Goodey said people could retire when they had a big enough portfolio of properties.
“A minimum four or five if they have low or no debt.”
He said people could aim to have seven and then sell a couple when they were ready to retire to reduce their debt.
Claire Matthews, author of the Massey University guidelines, said the amount people needed to save would depend on what their goals were for retirement, and whether they were planning to work at all.
They would also need to consider whether they were happy to use up all their money or wanted to preserve some.
Claire Matthews, author of the Massey University guidelines. RNZ/Nikki Mandow
“Owning your own home without debt would be helpful. But perhaps early retirement means living in a campervan and travelling around the country, in which case you don’t need a house – although it’s not as simple as that sounds.”
Opes Partners economist Ed McKnight said some people might be able to live on a partner’s income.
“Property investors might have rentals paying them an income. But most Kiwis will be relying on liquid assets – cash, shares, or managed funds they can draw down. And this needs to be outside KiwiSaver, since you can’t touch that until 65 either.
“Where does this money come from? Some people save it up. But more often it comes from selling an investment property or a business.
“One of our clients has a significant managed fund investment and draws down $60,000 a year. Her returns are strong enough that the balance doesn’t really go down.”
He said people should talk to a financial adviser to run through the numbers.
“Because it’s scary watching your balance drop. But if you run the numbers and know your spending will decrease once NZ Super kicks in, that gives you the confidence to actually pull the trigger.”
Opes Partners economist Ed McKnight. Supplied / Ed McKnight
How much will your expenses really drop?
If you own your own home, there are likely to be some costs that you can’t avoid.
RNZ earlier found that just rates and insurance would add at least $6000 in costs each year.
“The first $100 to $150 a week of your income is just rates and insurance before we’ve even started on maintenance,” Carlyon said. “There’s all these kinds of costs that are absolutely skyrocketing,”
He said people who retired early generally weren’t doing it to sit around not doing much, so you’ll need to be realistic about how much money you will really need.
Can you rely on the government?
You could retire and decide to live off government support but it’s probably not advisable or much fun.
Basic JobSeeker for a single person is only $361.32 a week after tax and before additional supports. You can’t access the accommodation supplement if you have more than about $8000 in assets.
There are also expectations that people receiving a benefit of this nature are looking for work.
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand