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Will You Outlive Your Cash?

Saving for a goal like a house deposit or a car is relatively straightforward – you know roughly how much you need to save.

19 October 2021

But saving for retirement is tougher. How much cash will you need to have invested to bridge the gap between NZ Super payments and what you need to live?

“Longevity is a real key issue for retirement, but the problem is, it’s still a huge unknown,” says Massey University’s Claire Matthews. She compiles the Retirement Expenditure Guidelines that help us plan using Kiwi retirees’ actual spending habits.

“The reality is none of us knows how long we’ve got,” she says. “It impacts how much we’ve got to save, but more particularly it does impact how long retirement is, and the amount of time you’re going to have to fund.”

We’re postponing retiring

Retiring is a new idea. Until the 19th century and the pensions system, most people expected that they’d be working all their lives. Now we expect to stop work at 65 or soon after.

But more of us aren’t stopping at 65. Thirty years ago, just nine per cent of people over 65 were working. Today, Statistics NZ says more than 20 per cent of people over 65 are employed, and that number’s rising.

With the number of people whose finances were, or will be, affected by the Covid-19 downturn, we may see those working on increase even more, as fewer older Kiwis are able to retire comfortably at 65.

Now, Urs Rohner, chairman of the Credit Suisse Group board, says in the paper Rethinking Retirement: “Retirement has become an integral part of our life biography: after education and years of work comes well-deserved rest.”

We’re working longer

But society is changing, Rohner says.

He says increased life expectancies mean that we can stay active for longer, and the rising imbalance between retirement and working life will be a problem for more people and economies in the long term.

Underestimating how long we’ll live is a real concern for the New Zealand Society of Actuaries, which put out a warning in its report to the government last year.

Daniel Mussett, convener of its Retirement Income Interest Group says: “Our research and analysis show that not only are lifespans continuing to increase, but that uncertainty around the age when we might expect to die is extending to later ages.”

He says people may find that their savings don’t last as long as they expected. Or they may find that the income they can sustainably draw from their pot of savings is lower than they imagined.

“It’s well-known that most people underestimate their lifespan.

“At worst, this could lead to financial hardship in the later years of your life. We think that careful planning based on good, up-to-date information on longevity can go a long way to avoiding this.”

Assess your risks

Matthews agrees you should plan for longer than you expect to live.

The first step is to look at your risk profile. “There are things you can look at to try to determine longevity. It’s going to be about your own state of health, it’s going to be about your family history, it’s going to be around choices you’ve made, if you smoked, where you live, and how you live.”

But predicting lifespans on those factors isn’t a perfect science. Even websites that use years of data and take lifestyles into account are just taking a stab in the dark. People can die abruptly from heart attacks and strokes. Then there are accidents too, cancer, and undiagnosed conditions.

Matthews gives her mother as an example of someone who is living longer. Her family history is bleak, with both parents dying before retirement age. She had a triple heart bypass years ago, and has ongoing health issues.

“If you’d asked her in her 50s, ‘How long do you think you have to save for retirement?’ she would have guessed around 70, 75.”

Instead, she’ll turn 82 this year. If she’d saved enough only to fund retirement to 75, her finances would have run out years ago.

Modern medicine is helping many Kiwis live longer.

Expect 90 to 95

So, what’s a safe ballpark figure?

The actuaries suggest that New Zealanders in their 40s or older should use an estimate for their likely lifespan of 25 to 30 years after age 65 (to age 90 to 95).

And turning 100 isn’t out of the question. “Testing a retirement plan to age 100 would be cautious for this group, and sensible for younger people, especially if female, with a healthy lifestyle or with long-living parents or grandparents,” they say.

Matthews also errs on the side of caution.

“When we do the retirement expenditure guidelines calculations, I work on a life expectancy of 90, which is at the higher end.

“However, it could be argued that it’s too short; that it should be longer, because people are living longer. Longevity generally is in the 80s, for average purposes, so I’ve added five years to that to provide a buffer.”

And don’t forget, people who are in their late 80s and 90s usually don’t spend much.

Factors to consider

The actuaries say their research shows that longevity depends on many different factors. These include:

  • Genes
  • The lasting influence from early life conditions
  • Healthy daily living
  • Keeping moving
  • Not smoking
  • Not binge drinking.

Mussett says there’s also an element of pure chance.

“It doesn’t make sense to try to find a single accurate age which you will live to. There is uncertainty about a range of factors, so best be prepared by thinking about the best- and the worst-case scenarios.”

On a positive note

Matthews says you should review your spending regularly in retirement and says a financial adviser can help you make your savings stretch.

“On an annual basis, you should do some sort of a review and every five years ask: How am I living now? What are my needs? What do I want to do in the next few years?

“You can’t just cruise through retirement, if you want a good retirement and few money worries over retirement, you need to continue to assess your position.”

If you fail to reach your savings goal, don’t panic. Matthews says she’s heard anecdotally that people who fail to save as much as they’d hoped for retirement still manage.

“They tend to actually be quite satisfied because they’ve just accepted that’s how things are, that’s how I live. This is what I can afford to do. They just don’t think about what they can’t do, they think about what they can do.”

That’s also likely because their expenses are low and are covered by the pension. In addition, if they only have a bit of savings and assets, or none, any required rest home level care is paid for by the government.

Your own figures

Want to estimate how long you’ll live? Try this Kiwi calculator, by Statistics NZ: www.stats.govt.nz/tools/how-long-will-i-live

The calculator is a good place to start, because it’s based on the most up-to-date mortality information available in New Zealand, says Mussett.

Enter your birth date, and it’ll provide median, pessimistic and optimistic estimates of your life expectancy.

If you’re a Māori New Zealander, note that in 2015, Statistics New Zealand reported that the gap between Māori and non-Māori life expectancy at birth had narrowed to 7.1 years. Māori baby girls were expected to live to 77.1 years (non-Māori 83.9) and Māori baby boys to 73 years (non-Māori 80.3).


Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

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