Booster: Your Guide to KiwiSaver, Part 4
Once you reach 65, what should you do with your KiwiSaver savings? Dave Copson, Head of Growth at Booster, provides a guide to help you make your money last.
6 February 2023
THE FIRST CHALLENGE IS CHANGING YOUR MINDSET
During your working life, your entire mindset is focused on accumulation. Building up your retirement funds, growing your KiwiSaver savings, developing your career, spending less, earning more. Then you retire, and suddenly you have to flip the switch on that mindset. You’re no longer bringing in an income. All your income is based on your investments and superannuation.
You’re no longer accumulating – you’re decumulating. It can be really difficult to get your head around making this switch.
I know that there’s an important story to tell about the many Kiwis who haven’t saved enough for retirement, and I don’t in any way want to diminish their struggles. But there is also a sizeable chunk of the retired population who are financially comfortable and yet feel conflicted or guilty about spending anything. Many of my previous clients, and even my own parents, are probably not enjoying their retirement enough.
FIVE WAYS YOU’LL SAVE MONEY WHEN YOU’RE NO LONGER WORKING
I’ve had a few conversations with clients over the years where they say, “I need to earn the same amount that I earn now, because that’s what I live off now and it’s a struggle.” Luckily, the situation isn’t as bad as they’re expecting. Usually, these clients haven’t thought about all the ways they’ll spend less once they retire from working. Here are five of the most significant ways you’ll save:
1. Housing. Hopefully your home loan is paid off by the time you retire, which will mean no more mortgage payments.
2. Transport. You won’t be driving to work every day or taking public transport, so your spending on travel decreases. Once you turn 65, you’re also eligible for a SuperGold card, which gives you free off-peak public transport travel, as well as other savings and discounts.
3. Clothing and food. If you buy your lunch and coffees during your workday, you’ll save a lot when you’re eating at home – it’ll be lockdown food spending again. When it comes to clothing, you’ll also save on work attire, which can be a decent sum if you’re expected to dress smartly in an office job.
4. Insurance. Review your insurances with an advisor. Your requirements change as you get older. Chances are, you can reduce or cut some of those costs when you’re no longer working.
5. Entertainment. Fewer post-work social events usually mean a little less spending on food, alcohol and entertainment.
USE RETIREMENT SPENDING ‘BUCKETS’
I think about retirement decumulation in terms of buckets:
- A five-year bucket for more immediate spending. This bucket would be invested conservatively, and it should include some cash in the bank for emergencies.
- A 10- to 15-year bucket that can be invested with some growth in mind, but with a balanced view. This bucket would replenish the 5-year bucket when required.
- A 15-year+ bucket for long-term spending, which can be invested in higher-growth assets. This bucket in
turn replenishes the 10-15-year bucket when required, and so on.
Not only will you spend less in retirement compared to your working years, but you’ll also spend much less in late retirement than early retirement. In your late 60s and 70s, you might spend plenty, for instance on travel, while you’re still in excellent health. Once you reach your 80s, you will find you slow down a bit and your spending slows down accordingly.
CONSIDER KEEPING YOUR MONEY IN KIWISAVER
Over the past four or five years, I think retirees have started to take KiwiSaver more seriously as an investment vehicle. Where people would often pull out all their savings and put it in the bank, now more retirees are leaving their KiwiSaver savings in place and even contributing to it. As a retirement savings vehicle, the fees are low, you get expert management and you can split your buckets of money across various types of funds.
I suggest you speak to a financial advisor, or even start by talking to your fund provider. Our team is always chatting with clients about how to manage their KiwiSaver savings to make them last the distance.
ARE YOU SPENDING ENOUGH?
There are two main reasons for retirees spending too little. The first reason is that they feel obligated to leave a ‘legacy’ of money for their children. That’s a personal choice, but in most cases their children are approaching their own retirement by the time they inherit and their financial situation is already sorted.
The second reason is that retirees are worried about running out of money. This may be a legitimate concern, but in many cases I have found that clients haven’t actually run the numbers. Even if they know how much they have at that moment in time, they don’t really have a sense of how long it might last or what their future cashflow might look like.
THE REALITY IS BETTER THAN YOU MIGHT EXPECT
Older New Zealanders are more confident than those aged 55 to 64, according to a report by Te Ara Ahunga Ora, Retirement Commission. That’s encouraging, because it shows retirement is a worrying prospect, but the reality is more manageable than we might be anticipating. The research found that the most important drivers for confidence in retirement savings are (in order):
- Owning your home
- Having savings
- Having investments
- Having self-funded retirement income
- Being retired
Kiwi investors expect to spend their KiwiSaver on living costs and adding to their savings. However, funds are often spent on either debt reduction or fulfilling a dream.
- KiwiSaver funds were spent on ‘something I’ve always wanted’ for 21% of those aged 65 to 69 and for 33% of those aged 70-plus.
- Funds went to paying off the mortgage or reducing debt for 16% of 65- to 69-year-olds and 19% of those 70-plus.
27% of over 65-year-olds are still working for pay.
1 in 5 Kiwis Retire Early - 20% of those aged 55 to 64 have already retired.
40% of those aged 55 to 64 haven’t yet given retirement and asset management much thought.
6 Out of 10 - 60% of those aged 65 to 69 haven’t yet made any KiwiSaver withdrawals.
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