For most of our clients, have the freedom to retire one day is a core financial planning goal. For a lot of people, this means having the choice about whether they work, or how much they work, or what kind of work they do.
Whilst 'retirement' is changing these days, with a number of our clients transitioning into retirement and spending a period of time 'consulting' or working part time, the reality is that at some time in your life, it is likely that you will end up living on your accumulated savings/investments/assets.
There are a number of 'rules of thumb' that have been bandied around over the years about how much you need invested to ensure that you can financially make it through your retirement. These include something like 75% of your income before you finish work, $1 million. $500,000.
The reality is that every person/couple is different. Over the last 18 years of putting together financial plans and working with our clients, we have yet to meet anyone who spends the same amount or in the same way as another person. Everyone has different priorities. You may want to provide funds for your children as a 'pre-inheritance', you may have elderly parents that you want to look after, you might have an expensive pastime that you have to cater for.
Your retirement planning is an important part of your financial planning and in our opinion, it is worth putting the time and effort into getting a good structure around your planning.
What are your assumptions?
The most important aspect of your retirement planning is the assumptions that you have put into that planning.
Changing any of the assumptions will change the amount of funds that you require to see you through retirement. Changing assumptions can also have a big impact on how much you need to put away now for your retirement years.
At Moneyworks we have built several retirement calculators that we personalise for our Membership Fee clients (clients that we meet with every year). These calculators can incorporate a number of variables that produce graphs to show the impact of those assumptions.
Key assumptions that you need to take into account include:
1. How long are you going to live? If you are part of a couple will you both live the same length of time?
As we get healthier and as medicine solves more issues, we are living a lot longer. If you make it to age 65 these days, you are highly likely to live until age 85. A child born today in the developed world will live on average to age 95. The last thing you want is to outlive your money.
2. What do you spend now, what will change when you 'retire'?
How much will you spend in todays dollars (we need to adjust for inflation), after tax? Will that change during your retirement - will it reduce as you get older? Do you need to allow extra for travel? Do you need to allow extra for whiteware and vehicle replacement? For house maintenance?
3. When will you retire?
Will you just stop work at a particular age? If there are two of you, will you both stop income earning work at the same time? Or will you carry on working for a while as a consultant? or part-time? Or will you take a lower stress, lower paying job to keep up your social contact? One of the things about retirement that we regularly read is that retirement can be socially isolating. Do you want to consider volunteer or paid work to keep you stimulated?
4. How much will you get from NZ Superannuation?
When we started working with our Membership Fee clients in the late 1990's it looked like NZ Superannuation would be reduced and phased out. At present, it looks like NZ Super at its current levels may be around for some years yet. In future the age of eligibility may increase, or the linking with inflation may change, or (an extreme possibility in our opinion) the entitlement may become means (asset) or income tested. You need to work out how much you think you are going to get from NZ Super in your retirement. At present, if there are two people in the same house who are entitled, and your marginal tax rate is 17.5% each, you will receive just under $30,000 pa after tax. If you are single and living alone, with the 17.5% tax rate, you will receive just under $20,000 pa.
5. What are you going to earn in retirement from working? For how long?
6. Will you receive an income from GSF, NPF, Overseas or other pensions? Is that taxable?
7. Will you repay your mortgage before you retire? Or are you planning on releasing funds from downsizing your home?
8. What investment returns will you get?
The choice of investment return that you make can make a big difference in how much you need to save to achieve your goals. At Moneyworks, we always use after tax, inflation and fees returns. We use international research to work out what return to use and depending on the risk profile of our clients, the returns will vary between 1% and 3%. The calculators that we have developed compare the impact of different rates of return, so that it is easy to visually assess the impact.
9. Are you anticipating getting an inheritance that will help you with your savings/funding of your retirement?
If you would like more information on planning for your retirement and the value of working with Moneyworks and Carey, Peter and Paul as an adviser as a Membership Fee Client, email us at email@example.com and we will get in touch with you to arrange a discussion with you.
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By Carey Church