This guide aims to help you plan for your financial security in retirement. Find out how much you should save to achieve financial independence, taking into account your individual goals and circumstances.
In this guide
- How much should you save?
- How long will you live in retirement?
- What income level do you need/want?
- How much savings do you need at retirement to meet your target income?
- How much do you need to save?
- Other issues – the cost of waiting, leaving assets for children, employer superannuation, NZ Superannuation benefit, how much can you afford to save, mortgages
- How will you invest your retirement savings?
- Calculating your own savinds needs
This guide helps you plan for your financial security in retirement. It helps you work out how much you should save to achieve financial independence, taking into account your individual goals and your circumstances. Initially, the guide looks at your retirement saving needs assuming a standard or average investment return. It then looks at how your required saving level can change, depending on the way you decide to invest your savings and then, whether you decide to save part of your savings through KiwiSaver.
How much you should save in the future will depend on a number of factors that are personal to you. Amongst these are:
- how long you will live in retirement
- what standard of living you want, and therefore the level of income you need to live on in retirement
- the period between now and your retirement i.e. how long you have to save
- the investment return that you will earn between now and your retirement and then, during your retirement
- what current retirement savings you have and the other sources of income (e.g. inheritances) you will get between now and retirement
- other sources of retirement savings/income, such as from an employer sponsored superannuation scheme, KiwiSaver and from the New Zealand Superannuation benefit
- how much you may want to leave your dependants after your death
- how much you can afford to save for retirement out of your income today, taking into account your other saving needs (e.g. your children's education). Saving for retirement is about allocating today's income between today's expenditure and tomorrow's expenditure.
So how much should you save? Well that depends on what sort of retirement you want and how you will invest your savings.
Putting these issues to one side, when it comes to building a secure retirement, you must remember:
- the sooner you start to save and plan for your retirement, the more likely you are to end up with enough savings in retirement
- saving a little (no matter how small) is better than not saving at all.
First, let's look at the two key issues:
how long are you expected to live?
what lifestyle do you want in retirement?
When you make it to retirement, the period you can expect to live in retirement, on average, is:
Age of retirement
|60||25 years||27 years|
|65||20 years||23 years|
Source: NZLT 2010/12 - 2 years
Females tend, on average, to live longer than males. This means that, all else being equal, females will need to have greater retirement savings; on average, they need about 10% more. Alternatively they can decide to spend less. Of course, not all females live longer than males.
The retirement periods shown are averages. As with all "average" statistics, half live longer and half shorter. In fact, while a 65 year old male will live for 20 years on average (i.e. until he is 85) there is a 33% chance he will live at least 25 years (i.e. until he is 90) and a 3% chance he will live to 100. So, about 1/3rd of all 65 year old males live to be 90 and about three out of a hundred will live to age 100.
Other statistics for 65 year olds are:
Probability of a 65 year old living a further...
|5 years (i.e. to age 70)||94%||96%|
|10 years (i.e. to age 75)||86%||90%|
|15 years (i.e. to age 80)||73%||81%|
|20 years (i.e. to age 85)||55%||67%|
|25 years (i.e. to age 90)||33%||44%|
|Probability of living to age 100||3%||6%|
Source: NZLT 2010/12 - 2 years
Remember, the longer you live in retirement, the more savings you need at retirement. If you have a partner, you should look at your combined total retirement period i.e. the time until both you and your partner die.
It may be better to assume that you live a little longer than average. It would be better to die leaving money behind rather than for you to live longer, and have the money run out early. Alternatively, you could look to buy an annuity to meet all or part of your retirement income needs. An annuity is a pension payable for the rest of your life and in some cases continues to a dependant on your death. However, annuities are often poor investments.
The level of income that you need/want depends on the lifestyle you want to have in retirement.
There is no hard and fast rule. Many advisers say that retired people need an after-tax income in retirement in the range of 45% to 60% of their before-tax pre-retirement income. So, if you earn $50,000 p.a. gross just before retirement, you will probably spend between $22,500 and $30,000, after-tax, each year in retirement. Other examples are:
|Gross income before retirement||Likely expenditure after retirement|
|$30,000||$13,500 to $18,000|
|$50,000||$22,500 to $30,000|
|$75,000||$33,750 to $45,000|
|$100,000||$45,000 to $60,000|
|See how much comes from NZ Super|
The right target for you depends on your own circumstances. For example, you may need more if you still have a mortgage at retirement or if you live in rented accommodation. Rather than simply accepting the 45% to 60% target, you should prepare a budget of your likely retirement expenditure and how this will change over time. Included is a form that may assist you calculate your current expenditure and let you estimate your likely expenditure in retirement. You should compare your likely expenditure with your current income and update it regularly.
Once you know how much income you want each year (your target income), and how long you may live in retirement and how much you will get from New Zealand Superannuation, can estimate how much savings you need to achieve your goals.
The amount required to achieve a target income, which increases each year to match inflation, will depend on various economic factors, including the interest earned in retirement on your savings, the rate of inflation and how long you live in retirement. We can estimate the amount needed to achieve the target by making guesses about each of these factors.
For example, if someone:
• who was retiring at age 65; and
• wanted a tax-free income in retirement of 50% of their gross pay
• that will maintain its value in real terms (i.e. go up each year by inflation)
They will need to have savings at retirement of about 8 times their pay. In fact 7.8 times their pay for a male or 8.5 for a female. This assumes that they earn a real after-tax return of 2.5% p.a. on their savings in retirement. That is, if inflation is 3%, the investment return will be approximately 5.5% after-tax; if inflation is 2% the investment return will be approximately 4.5% after-tax.
This is worked out as follows:
|Tax at, say 28%||2.14%1|
|Net real return||2.50%2|
1 Note with the “Portfolio Investment Entity” tax regime (PIE) the maximum tax rate is not 28% of the pre-tax return. This is below the top personal rate of 33%. The taxable income now depends on the source of return.
2 The “net real return” is the only one that matters.
If the actual return/inflation levels are different, then higher/lower amounts will be needed. The table below looks at the level of capital that you need under various assumptions.
Age at retirement
Real after tax returns
|60||9.5 x||10.4 x||9.0 x||9.7 x||8.5 x||9.1 x|
|65||8.2 x||9.0 x||7.8 x||8.5 x||7.4 x||8.1 x|
So, if you are male and real after-tax returns are 2.5% p.a., you’ll need 7.8 times your pay at retirement at age 65 to give you an inflation-linked pension of 50% of your pay (8.5 times if you are female). The table shows that, total retirement savings (i.e. from all sources) need to be significant. Remember the table assumes that you have “average" life expectancy. If you live longer you will need more.
How much you need to save to achieve your target income depends on how long you have to go until retirement, how much you have already saved and your other future sources of income (e.g. inheritances), employer-sponsored superannuation, KiwiSaver and the New Zealand Superannuation benefit.
If you save 1% of your pay, the graph shows how much you will have by retirement over the periods indicated. If you save more than 1% of your pay, simply multiply the numbers on the graph by the percentage you actually save. These figures assume that your pay increases each year by the inflation rate, and that your savings will earn a real return of 2.5% p.a. after-tax and expenses. It also assumes that you meet the full amount of the savings. If you save through KiwiSaver then part of your savings will also come from the government by way of the government contribution and part from your employer.
For example, if a member with 30 years to go to retirement saves 1% of pay each year, he/she will have a lump sum of 44% (i.e. 0.44) of pay at retirement at age 65. Again, if a 35 year old wants to have total savings at retirement at age 65 of 8 times pay, he/she needs to save just over 18% (i.e. 8 divided by 0.44) of pay each year. This assumes that they have no retirement savings already and ignores the subsidies available under KiwiSaver and the portion of their retirement income funded from New Zealand superannuation.
You need to take into account any other savings you have that are designated for your retirement. This does not include any savings for a holiday or a new car etc. Your current savings will also increase with investment income to provide you with a bigger asset at retirement.
The graph below shows how current savings of $10,000 will grow over various periods to retirement. These figures are shown in today's dollars, assuming that the after-tax interest credited to your savings exceeds inflation by 2.5% p.a.. To express the figures as a multiple of your pay at retirement, divide the numbers on the graph by your current pay.
Since 1 July 2007, New Zealanders and permanent New Zealand residents under age 65 have been able to join KiwiSaver and save for part of their retirement via KiwiSaver. KiwiSaver is a tax-favoured-government-incentivised voluntary savings regime. If you are an employee, are age 18 or older and under your KiwiSaver retirement age, and you are saving to KiwiSaver, your employer must also compulsorily subsidise your savings. KiwiSaver does not affect entitlements to New Zealand superannuation.
As a member of KiwiSaver, your savings are:
- If you are an employee and subject to PAYE tax:
3% of your total taxable income. This can be increased to 4% or 8%.
- All other KiwiSavers including the self-employed, non-working spouses, beneficiaries and children:
The amount you agree with your KiwiSaver provider. This can be nil.
If you save under KiwiSaver, your savings are subsidised each year by the government and, if you are employee, by your employer. The government and employer subsidies only apply if you are 18 or older and under your KiwiSaver Retirement Age (age 65 when you joined after age 60 then it is 5 years’ after you joined).
Government subsidy: $1 for each $2 saved up to $521.43 a year. This is based on a 1 July to 30 June year.
Employer contribution: 3% of your total taxable income. This is taxed and only the net amount is paid to your KiwiSaver account.
The combined effect of the government incentives and employer subsidy increase your retirement savings and therefore reduce the amount you need to save from your own resources to achieve the same goal.
If you have been a member of KiwiSaver for at least one year, you can go on a “savings suspension” i.e. stop making savings. If you stop saving, the government and employer subsidies also stop.
Your KiwiSaver retirement age is the later of the age of eligibility for New Zealand superannuation (currently age 65) and the date five years after you first join KiwiSaver.
The cost of waiting
The sooner you start to save, the better off you will be at retirement. Also, saving a little, no matter how small, is better than not saving at all.
To illustrate, let’s take a person whose pay is $30,000 and who has decided to save 5% of pay. We can compare the expected retirement benefit in today's dollars assuming the saver starts saving today against deferring it for either 5 or 10 years.
For a 35 year old, who wants to retire at 65 (in 30 years) the cost of waiting 5 years (i.e. starting to save at age 40 and not age 35) is $14,800 (i.e. $66,680 - $51,880). That difference is 59% of pay at retirement (i.e. $14,800 divided by $30,000). The sooner you start saving, the greater will be your retirement security.
The chart assumes that the real after-tax return is 2.5% p.a. Different costs apply to different assumptions but the pattern is the same - the longer you wait, the less you end up with. “Waiting” in this context is spending and not saving, and saving does not mean investing in a “managed fund”. Increasing your mortgage payments or building a business are also good forms of saving.
Leaving assets for children
Rightly or wrongly, some people wish to leave assets to their children following their death. There is nothing wrong with this, provided that you realise that for every dollar you wish to leave your children, you have to accumulate another $1 during your life-time. If you want to leave an inheritance for your children, your decision is whether to save more for retirement or spend less in retirement, i.e. on yourself and your partner. Whatever decision you make it makes sense to plan for it, and to recognise that leaving money to children costs you either today, by way of increasing savings, or tomorrow by way of reduced expenditure.
While the power of savings is in your hands, you (or your partner) might be able to join an employer subsidised superannuation scheme. Each employer's scheme is different, but as a general rule, joining an employer's scheme is one of the "best" forms of saving. “Best” because normally the fees are lower than other superannuation schemes, and also “best” because the employer sometimes subsidises a member's contributions. If you have access to an employer sponsored scheme, you should probably join it particularly if it incorporates KiwiSaver.
Also, if you can save through an employer scheme by “salary sacrifice” that may normally means that less of your savings goes in tax.
New Zealand Superannuation benefit
In preparing your savings plan for retirement, you should also take into account the benefit payable from the state. Under current legislation, New Zealand Superannuation is payable in full to all New Zealanders who meet minimum residency requirements. The level currently changes each 1 April.
Details of the current (from 1 April 2019) benefit levels are:
Current gross rate ($)
After-tax rate ($)
|Married person (one qualifies)||18,741.84||16,446.04|
|Single person (sharing accomodation)||22,731.28||19,735.04|
|Single person (living alone)||24,721.84||21,379.80|
|Married couple (both qualify)||37,483.68||32,892.08|
While no guarantee can be given, it is likely that some form of state benefit will always be provided. It is up to you to decide how much you wish to rely on it in your planning.
How much can you afford to save?
Saving is really deferring your spending. You decide not to spend money today, but to put it away for spending tomorrow. So far, we have focussed on what level of income you might want in retirement and how much you need to save to achieve this.
You must also calculate how much you can afford to save. If you cannot afford to save the required rate, you may have to revisit your retirement goals. Saving for retirement allocates your income today between today’s expenditure needs and your future expenditure needs.
Mortgages & debts
Saving for retirement does not always mean saving in a superannuation scheme, or in a managed fund, etc. Equally relevant is investing in a business, investing in further education and paying off debt. Paying off debt is normally one of the best investments you can make, provided that you don’t then go out and take on more debt. The main reason is that the interest rate you pay on a mortgage or credit card debt is not tax deductible. For example, if you pay 7% on your mortgage and are taxed at 33% on your income, paying off your debt is equivalent to a 10.4% p.a. gross return (probably 12% if you allow for fees). To do better than this long-term, you will probably need to invest 100% in shares and even then it is unlikely and cannot be guaranteed.
Reducing your debt also reduces your risk if something unexpected happens like losing your job, becoming disabled or having to retire earlier than you expected. Your first financial objective should be to pay off all your debt by the time you retire.
In section 6 (How much do you need to save?), we used a single set of assumptions about future investment returns. In reality, your savings at retirement will be a function of the amount you save, and the investment earnings on those savings. Accordingly, if your aim is a particular savings level, you can achieve it by way of low savings and high returns or high savings and low returns or somewhere in between.
The return you achieve (high or low) is normally a function of your investment strategy, that’s the split of your money between cash assets (e.g. bank deposits), bond assets (e.g. government stock), property assets and share assets. Long-term, the more shares in the mix, the higher average return. However in the short term, the more shares you own, the higher the uncertainty of your immediate returns.
If your target savings level is $100,000 in today’s dollars, to be achieved over 20 years, the annual savings level at different net real investment returns is:
|Investment return (net real p.a.)||1.5%||2.0%||2.5%||3%||3.5%||4.0%|
|Annual savings level (today's dollars)||$4,292||$4,075||$3,866||$3,667||$3,475||$3,292|
The table shows if your investment return is a net real 1.5% a year, you need to save $1,000 more a year, for 20 years, than that required if your investment return is 4.0% p.a. real (i.e. $4,292 less $3,292).
The investment return, over time, is the result of your investment strategy (i.e. cash versus bonds versus property versus shares). When you decide how much to save, you must also decide how you will invest your savings before retirement and in retirement. If you have a while to go to retirement and you invest more in shares than cash, you should get a higher (but more variable) return. That means you can probably save less to achieve the same goal.
To help you work out how to invest your money, see the SuperLife guide, “thinking about investing”.
Some words of warning
Nothing is certain in life. We don’t know what your investment returns will be. We don’t even know how long you will live. So, even if you follow the worksheets to the letter, we can’t promise you things will turn out as you expect. All that means is that you should review your target, and your progress towards it, every few years or if something changes (in your life or in investment markets). Uncertainty is an enemy of well-made plans but it’s no excuse for not planning. While every care has been taken in designing the worksheets, due to the uncertainties in terms of interest rates, inflation, the level of state benefit, your life expectancy etc. we cannot guarantee that a person who follows the worksheets will end up with exactly the expected level of retirement savings. To avoid the risk of not having enough savings you should review your savings level on a regular basis to monitor your progress towards your goals from year to year.
In order to simplify the worksheets, we made a number of assumptions (or guesses about the future). The amount you actually need to save will depend on whether these assumptions match actual experience. It’s important that you monitor your retirement savings and update your “Retirement savings worksheet” on a regular basis (say, every 2 to 3 years).
The more important assumptions underlying the worksheets are:
- after-tax investment returns in retirement will be 2.5% p.a. above inflation.
- after-tax investment returns before retirement will be 2.5% p.a. more than your pay increases.
- you and/or your spouse live for 20 years in retirement in total.
- New Zealand Superannuation benefit levels keep pace with both inflation and your pay increases.
- current tax rates and legislation remain unchanged.