How To Save For Retirement
To pay for life after work, most of us will face a money gap after NZ Super. Brenda Ward asks the experts how to go about saving for retirement.
19 October 2021
Have you worked out how much money you’ll need for your retirement lifestyle?
Are you dreaming of a future of exotic travel and a bach by the beach? Or is it sounding more like a bus ticket and camping?
Don’t despair. The experts say it’s possible for most people to speed up their savings to help them cover the shortfall between NZ Super and the life they want after work.
What’s your net worth?
Financial adviser Lisa Dudson of Acumen says the most powerful tool to keep you on track could be as simple as seeing where you’re at each year.
“I’ve worked with a lot of people in their 40s and 50s planning for retirement,” she says. “One of the things that I get them to do is something I’ve been doing myself for about the past 15 years. It’s to track net worth.
“That enables me to say, do I need to put my foot on the pedal, or can I relax a wee bit in terms of my spending and saving?”
To calculate your net worth, add together the value of your house, car, and other assets, add your KiwiSaver balance, any other savings and investments. Then subtract any debts or mortgages. It doesn’t matter too much what your net worth is, just that it’s growing.
“It doesn’t matter whether you’re starting with a thousand dollars or a million dollars, just being able to see your progress from year to year is fantastic for awareness, and also incredibly motivating.”
How experts can help
For retirement planning, it’s good to get expert advice, says Dudson. This phase is all about growing assets that will (eventually) provide you with an income, so you can give up work. A financial adviser can give you strategies to get that nest-egg set up.
They’ll also help you spread your investments across a range of asset classes and risk levels, so that if one asset class is down, others should still do well for you. This is called diversification, which helps to spread your risk, and helps to keep your money safer.
Here are some ways to build that nest-egg.
Pay off your mortgage
Paying off your home loan is one of the safest investments.
Says Dudson: “In an ideal world, you want to get to a point of having a home paid for as a minimum, because having a home is compulsory savings.”
Financial adviser Martin Hawes points out if you pay it off faster, you’ll be saving the interest you’re currently paying on your home loan, say 4 per cent.
“To do as well as paying off the mortgage, you’d have to get an investment return of 4 per cent a year, after tax and fees.”
That return would be possible, he says, but probably not risk-free.
Reaching retirement without a mortgage is a very good strategy, as it will reduce your costs in retirement significantly. You’ll still have rates and insurance to cover, but no repayments.
An investment property can be great for growing your wealth up until you’re close to retirement, says Dudson.
If you’re happy to accept the responsibility that comes with a rental, like regulations and dealing with potentially painful tenants. Rentals can end up being more trouble than they’re worth.
But once the mortgage is paid off, there are probably better ways of investing such a large amount of money, Dudson says.
“The challenge with property from a retirement perspective is that the return on investment of the property reduces as the equity goes up and the mortgage goes down. Also the income received can be quite low and you have limited flexibility and liquidity.”
Work and save
There’s a tremendous advantage to having two incomes in a family.
When the kids leave home, and the mortgage is paid off, expenses usually drop, and it may be possible for a couple to live on one income and save a good part of the other until they retire.
An increasing number of people are working past 65, meaning they can live on their wages and turn their NZ Super into savings (though you’ll be taxed higher on your Super if you’re still working).
Every year you work past 65 has two bonuses. One, you’re still earning and saving, and two, it’s one less year you need to fund using your retirement savings.
Contribute to KiwiSaver
Your KiwiSaver account is a great way to grow your nest-egg. You can invest percentages of 3%, 4%, 6%, 8%, or 10% of your pay. Your employer will put in 3 per cent, and you’ll get a government bonus too, if you’re contributing enough.
Need to build up your money faster? Try increasing your percentage every year.
For many years, Kiwis used to put their money in bank term deposits for overlapping terms. But Pie Funds wealth adviser Simon Hepple says this might not be a good idea now, because of inflation.
“If you’ve got a term deposit paying you 2.8 per cent, strip the tax out of it and you might be left with just a little over 2 per cent. That’s what the official rate of inflation is. That means your money’s actually earning you a zero return.”
If you’re considering a term deposit, do your research, because rates vary a lot.
Use your home
After paying a mortgage most of their life, many people end up with a lot of equity locked in their homes. They’re asset-rich but cash-poor.
You could rent out part of your house on Airbnb, or take in a flatmate or a student.
Or some people plan to downsize to a cheaper house to free up savings.
Dudson says if you spend your retirement savings too early a ‘home-equity release’ or reverse mortgage is a great back-up plan.
It’s like redrawing the money invested in your own home – and you can live in the house as long as you like.
Heartland Bank’s Andrew Ford says: “A reverse mortgage is just like a standard mortgage, but you have no regular payments, you get greater protection and more flexibility.
“Interest is added monthly and repaid when the property is sold, or the last owner dies.”
Simon Hepple is a wealth adviser for Pie Funds. His disclosure statement is available free of charge at www.piefunds.co.nz.
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