Peter Clare: Retirement maths adds up to a huge shortfall

A survey of retirees shows 36 per cent have enough money for only a basic standard of living. Photo / Bradley Ambrose

Opinion

KiwiSaver and financial literacy at an early age are steps in the right direction, says Peter Clare, chief executive of Westpac NZ.

It was sobering to see that a large percentage of New Zealanders are not enjoying life in retirement because they are feeling a financial pinch. They simply haven't saved enough through their working life to afford to do what they would like to. And we're not talking an extravagant letting down of the hair here, but the odd meal out or an occasional holiday.

The Financial Education and Research Centre (FinED) - a partnership between Westpac and Massey University - has released a report on the actual cost of living in retirement including a survey of 500 New Zealand retirees. It showed 47 per cent do not have adequate financial resources for retirement, 33 per cent are not satisfied with their lifestyle and 36 per cent only have enough money to provide a basic standard of living.

The report uses the Statistics New Zealand triennial Household Economic Survey as a base for calculating expenditure in retirement. It is inflation adjusted since the last one in 2010 and has two categories, a self explanatory "no frills" lifestyle of existing with the bare basics or a "choices" lifestyle.

"Choices" means a couple living in Auckland or Wellington is able to afford around $100 a week on a recreational or cultural activity and the same amount for miscellaneous goods and services. In provincial areas, they spend $90 and $70 respectively on those activities.

A "no frills" couple in Auckland or Wellington can afford just under $240 a week on the basics. A "choices" couple spends just under $760 a week living, but not extravagantly by any measure.

The worrying aspect of this is that it does not include the cost of accommodation - either rent or mortgage - and the associated costs such as rates and insurance.

An underlying conclusion of the report is that if you haven't paid off the mortgage by the time you retire, that extra outgoing will be financially crippling for someone in their late 60s, and likewise if you are renting.

The maths is simple. There is already a shortfall of over $200 a week between the superannuation payment for a couple of $550 a week and the average of $760 a week for those able to have a little choice in retirement.

So, to cover that shortfall and add in $150 a week for accommodation and associated expenses means a savings gap of $270,000 at the age of 65, working backwards. To make that up requires saving $85 a week from the age of 30 only. KiwiSaver could assist partially with that.

There are of course, big picture possibilities to consider also. Increasing the mandated contribution of your salary to KiwiSaver is an obvious one and/or maybe an incentive scheme to encourage a longer working life.

There is no doubt KiwiSaver is a step in the right direction. But it is only a start, not a full solution. Australia requires a 9 per cent superannuation contribution of salary lifting to 12 per cent by 2019; China is 8 per cent and Singapore up to 20 per cent. KiwiSaver sign-ups have slowed over the current year with an average of 16,000 per month versus 25,000 per month a year ago. Lifting the contribution level may affect the take-up rate further but tying in a sustained education piece could help create the understanding and acceptance of the need to lift the contribution level for the benefit of individuals and the country.

Of course, the younger that education process starts the better. Making financial literacy part of every school's curriculum - from primary to secondary school - is one way to create the necessary cultural change and that is what the savings discussion is about, creating a change in the Kiwi mindset. At Westpac we have found there is a real thirst for financial literacy among Kiwis with more than 13,000 completing one of our managing your money workshops this year and more than 45,000 have completed one since 2009. Financial literacy is a life skill and as such we all benefit the earlier we learn it.

Countries such as Japan have successfully incentivised a longer working life. A report on retirement income systems in OECD countries last year included looking at those leaving the work force between the ages of 60 and 64. Japan had the lowest withdrawal rate with 75 per cent of 60-64-year-olds in work and it also had the lowest tax on those continuing in work. Conversely, Belgium, Italy and the Netherlands had the highest tax on those continuing to work and it also had the highest withdrawal rates with only 20 per cent of 60-64-year-olds in work. Currently, 68 per cent of 60-64-year-olds here work and the New Zealand tax system is based on income not age.

The average life expectancy of New Zealanders after reaching 65 has nearly doubled over the last century and is on track to be 82 for men and 87 for women by 2030. The notion of retiring at 65 is simply outdated in the 21st century. As people live longer, the cost of paying superannuation increases and there are limited options available for Government to offset that extra cost (possibly reducing the amount paid or tightening eligibility). It should reinforce personal responsibility and the importance of saving for retirement if you want to retain a good quality of life. I certainly don't want to be a burden on my children's financial future, a perspective I think most Kiwis would share.

The importance of saving is a discussion that needs to keep developing. Anyone doubting that need only look at the findings of the FinED survey and think about how they might be placed when they receive the gold watch or punch the clock for the final time.

For too many Kiwis, retirement shapes up as a tough reality check with those two horrible words running around in their minds - what if (we saved more)?