There's no need to gamble on accumulating a million dollars or more - you can retire on much less. Photo / Getty Images
COMMENT
Q: My latest KiwiSaver statement projected a balance of $253,000 when I turn 65 in 14 years, allowing about $200 per week.
I thought that sounded positive, until I went to ANZ's KiwiSaver calculator, which said that for a comfortable life I would need about $1.65 million, or $1190 per week (cash, after housing) — about twice what I can expect from combined KiwiSaver and NZ Super.
A back-of-the-envelope calculation shows that this weekly cash is much higher than what one gets from NZ's median income. Is it reasonable to assume that we need so much more money in retirement than during working life? How can the average person save so much?
A: They probably can't without cutting back hugely on their spending. And they don't need to.
I'm sick of people being told they need $1 million — let alone $1.65 million — for a comfortable retirement. It's funny how that information usually comes from people or companies who stand to gain from you saving more!
In ANZ's defence, they didn't pull their numbers out of thin air. Their KiwiSaver calculator says, "The figures are taken from the New Zealand Retirement Expenditure Guidelines (2018) and represent a comfortable standard of living in retirement, which includes some luxuries or treats."
These guidelines come from Massey University. They "provide information about actual levels of expenditure by New Zealanders who have already retired."
However, it's important to note that the guidelines are broken down three ways:
• One-person and two-person households.
• "No frills" and "Choices" budgets.
• Metro and provincial.
The $1190 weekly spending you got from the calculator is for one-person, choices and metro households. It's the highest per-person number.
If you were looking at provincial, no-frills, two-person households, the weekly spending in the 2018 report was $630, or $315 per person — plus any rent or mortgage payments.
That's a far cry from $1190, and it makes your $200 a week plus NZ Super look much better.
The Massey report breaks down spending into categories. And it doesn't just say "food". It gives amounts spent on: fruit and vegetables; meat, poultry and fish; grocery food; non-alcoholic beverages; and restaurant meals and ready-to-eat food.
You can see the latest 2019 guidelines at tinyurl.com/RetSpending. The breakdowns are in Appendix 1.
If you watch your spending for a few weeks, you could see which guideline best fits you.
No doubt some people will criticise me for saying that you don't need to save desperately from now on. But it doesn't make sense to live really frugally now so you can spend up large later. Also, I think unrealistic savings goals make many people just give up.
Some more factors that might comfort you:
• Your projected KiwiSaver balance of $253,000 is adjusted for inflation. So when you retire, it is expected to buy what $253,000 buys now. In other words, don't worry about inflation reducing the value.
• Your projected $200 a week assumes you will leave all your KiwiSaver money in a lower-risk fund through retirement. However, I suggest that you use a low-risk fund only for the money you'll spend in the next few years. Use a middle-risk bond fund for three- to 10-year money and a higher-risk fund for later spending.
Move money each year to maintain this allocation. And don't panic when the middle- and higher-risk balances drop sometimes. They've got time to recover before you spend.
If you do that and — importantly — select a low-fee provider, you should have more weekly spending money.
• Many New Zealanders over 65 get by on not much more than NZ Super. Last week I quoted a 2017 report by Bryan Perry that said 40 per cent of singles over 65 have virtually no other income than NZ Super, and 60 per cent get less than $100 a week from non-government sources.
Couples are better off, but still 30 per cent get less than $100 weekly from non-government sources, and 55 per cent get more than half their income from NZ Super.
Those numbers are a few years old. Maybe KiwiSaver has improved things a bit, but probably not much yet. It all puts the "you need a million" argument in perspective.
Q: I'm mid sixties, hubby just 70, both on NZ Super. We own a small business which we had hoped to sell for around $500,000 until Covid hit.
Our home presently is worth around $1.5 million. We have $60,000 in KiwiSaver and $200,000 in mortgages.
I'm keen to cash up and wander off to retire. Realistically, we can't add anything to our assets now. I feel we might get half the business's worth and a good price for the house.
Hubby wants to hang on, hope business recovers and cash up next year. I worry that while the sell price of the business may go up (slightly), the value of the house may drop more.
The plan is to buy a house around $600,000 to $700,000 and make diversified investments with the balance (how is another question!) Keen to hear your thoughts.
PS: Hubby worries about the money whereas I feel like we have plenty!
A: Tricky stuff. It's always impossible to predict house prices or business values, and in the current environment it feels doubly so. You expect the house to lose value and the business to gain, but it could be the reverse!
Then there's the question of how much you need in retirement.
If you made your moves now, you would get about $1.3 million from your house after paying off the mortgage. Once you've bought the new place, you would free up about $600,000 plus $60,000 in KiwiSaver.
Even if you get only $250,000 for the business, your savings should total about $900,000. Most people would say that you've understated it — you have more than plenty. See the previous Q&A.
On the other hand, it must be sad and frustrating to see the value of your business drop so far. I don't blame your husband for wanting to wait and hope.
Here's a possible compromise. Talk to a business broker — or better still, two or three brokers — to get an idea of what your business might sell for. Then add 10 or 20 per cent and put it on the market.
If it sells at that higher price, hubby will hopefully feel okay about it. If it doesn't, perhaps take it off the market after a few months, and try again next year at a business broker's recommended price at that stage.
Set yourselves a deadline of, say, July next year. If you haven't sold the business by then, slash the price so you can get rid of it and move on to enjoying your retirement.
Even in a worst-case scenario, you will retire with far more than most people.
Meanwhile, of course, house prices might fall. But to some extent a drop in the value of your current house will, hopefully, be offset by a drop in the house you buy.
On investing your savings, I suggest you use several low-fee KiwiSaver funds in the way described in the Q&A above.
Q: In your last column, a reader said that a subcontractor was not providing payslips to holiday kiwifruit pickers, including his daughter. This was causing problems when she was applying for a benefit.
I would strongly encourage you to advise the correspondent to forward the contractor's name to info@nzkgi.org.nz.
NZ Kiwifruit Growers Inc works really hard to get the message through to the industry that all labour laws must be adhered to. Subcontractors like this have no place in our industry.
A: It's good to hear that the industry has set high standards. I've passed your message to the reader.
Q: Here's one additional piece of information to offer to the woman you gave great advice to last week, to buy the house she is renting.
She can take out a reverse mortgage to help her should finances get a bit tight in the future. The value of her home will surely increase at a better rate than the mortgage rate she pays.
A: Good point, although I'm wary of pushing the reverse mortgage idea too much, for a couple of reasons.
But first, what are reverse mortgages? They are usually used by retired people who have fully paid off their ordinary mortgage, or have only a small mortgage left. They borrow money, using their home as security, and make no repayments.
That means the loan grows over the years, with compounding interest. It's usually paid off after the home is finally sold — when the person moves elsewhere or dies.
Reverse mortgages can be a good way for a person or couple to make use of the many thousands of dollars they have "locked up" in their home. However:
• The interest rates are considerably higher than on ordinary mortgages. Heartland Bank and SBS Bank, the two main providers of reverse mortgages these days, charge 6.2 per cent.
• The compounding interest means a loan can grow hugely over several decades. If you borrow $50,000 at 65, at today's interest rate it will be $235,000 when you're 90.
In light of this, I strongly recommend people don't take out a reverse mortgage until later in their retirement.
You might, for example, spend your savings until you are 80 or 85 or 90. After that, finance your spending with NZ Super and a reverse mortgage. If you don't borrow the $50,000 until you're 80, it will grow to "only" $93,000 when you're 90.
What's more, the lender will let you borrow more if you are older — because the loan has less time to grow.
Another tip: borrow the money as you need it, rather than getting a lump sum at the start. You could set up a payment of, say, $200 a week, and make larger withdrawals for repairs or a car or travel. You don't want a large amount sitting earning next to nothing in the bank while you are paying 6.2 per cent for it.
Depending on your family circumstances, you might want to tell your children, or others who might expect to inherit from you, that your estate will be reduced by the repayment of the reverse mortgage.
It's probably better that they know to expect less. And it's also a test. If the kids object, that might be a sign that they don't deserve an inheritance anyway!
Turning to last week's 72-year-old reader, I had suggested she plan to spend her savings until 85 and then live on NZ Super. But she could change that to 80 — giving her considerably more to spend each year in the meantime — and then use a reverse mortgage.
A note of caution: you say the value of her home should grow faster than the mortgage rate. But I don't think she or anyone else should count on that. Who knows where house prices will go?
However, you can borrow only a portion of the value of your house — at Heartland it might be 20 per cent at 65, or 35 per cent at 80 — so it would be surprising if the loan ended up exceeding the house value.
If it does, both Heartland and SBS offer a "no negative equity guarantee", which means you or your heirs won't have to pay back more than the proceeds of selling the home.
Heartland's website has a calculator to show how a reverse mortgage might work for you. There's also a good article on reverse mortgages on consumer.org.nz.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
How many people had paid deposits was not stated but pre-sales said to be 'strong'.