Retirement savings gap: Pre-retirees urged to save more due to inflation

High costs are biting into retirees' savings. Photo / 123rf

High inflation has pushed up the living costs for current retirees at a faster rate than the general population - widening the gap between what they get in New Zealand Superannuation and their spending, a new report reveals.

The annual Massey University New Zealand Retirement Expenditure Guidelines report found higher transport, housing and food costs meant those over the age of 65 faced inflation of between 7.17 per cent-9.1 per cent over the year to June 30 depending on what they spent their money on.

For most groups that was higher than the Consumer Price Index increase of 7.3 per cent.

Report author retirement policy expert Claire Matthews said high inflation eroded the purchasing power of people's income and reduced the value of fixed income investments.

"It has certainly had an impact on their expenditure."

But the lump sum amount needed for a choices retirement hadn't increased dramatically as there was an expectation the high inflation was temporary.

"What we have to try and remember though this is a blip in terms of inflation. We have to remember it shouldn't continue and we should go back to the old numbers."

Matthews said the report assumed a 2 per cent inflation rate to work out the lump sum needed to cover the costs of living retirement rather than extrapolating out the current high rate.

That meant for a two-person household a lump sum of $755,000 was needed for those wanting a choices lifestyle in a major metropolitan city and $480,000 for those in the provinces.

For a one-person household it was $561,000 for those wanting a choices lifestyle living in a major city or $658,000 for those living in the provinces.

The lump sum amount is based on the shortfall between New Zealand Superannuation and current retirees spending.

Matthews said her 2019 study showed retirees were using a range of methods to bridge that gap including working part-time or full-time and drawing down on investments.

"People who are currently retired have got income that allows them to spend at this rate."

But she said high inflation was also likely to have seen people change their behaviour - something that was expected to come through in next year's household expenditure data.

"Because we are just doing an inflation adjustment we haven't accounted for that at all. We have just said if they continue to spend at the same rate then based on inflation this is what the impact would be. But in reality because of the impact of inflation they are probably changing the way they behave."

The current data was also extrapolated from 2019 spending which was likely to have changed due to Covid.

"It possibly will include a higher level of recreational and travel spending than they have been doing more recently simply because the opportunities aren't the same."

While international travel has come back now, Matthews said retirees might not be able to do as much as they could before if the costs were too great.

Katrina Shanks, chief executive of Financial Advice New Zealand, said even though CPI was running at 7.3 per cent the CPI basket for retirees was much higher.

"What we are seeing for many retirees is the impact of inflation has been much higher this year than actual CPI itself so they are much worse off than others."

She said the lag in the increase in NZ Super also made it tougher for retirees.

"It was increased when inflation was only around 5.9 per cent, yet it is now 7.3 per cent, so there is a real lag in keeping up with inflation."

Shanks said that eroded people's savings as they had to rely more on their savings to pay for day to day living costs.

And it meant they were chewing through their savings and investments faster.

"We know that in all of the groups there is a gap between superannuation and what a retiree spends from this research and that gap has increased significantly in this report."

Shanks said it had big implications for those in generation X where some were only eight years away from hitting age 65.

"This report isn't just about those which are retired and understanding what you need to save, it's the same for those especially in generation X which are eight years away. Their runway for increasing their lump sum saving, so they can have some money in retirement to supplement their super, is now getting less and less."

Massey University retirement policy expert Claire Matthews.

Shanks said saving for retirement should be front of mind for people in their 50s.

She said the lump sum requirements was significant to have a choices lifestyle.

"Choices is just above no frills and doesn't mean you are going to have an extravagant lifestyle."

The report highlighted the need to start saving now and increase it if possible, she said.

"What we know right now is that those on fixed income investments, KiwiSaver and other managed funds have reduced. We know the values of portfolios have reduced, we know that inflation is eroding their savings."

She said the research highlighted the need to start planning for retirement, especially those in generation X.

What can current retirees do?

Shanks said it was fairly tough for current retirees.

"What you can do depending on your age and your risk profile is look at where you have got those funds invested and when you are going to require them is how you invest.

"If you are 65 and there are some funds you are not going to use until you are 80, it doesn't mean they should go into a conservative fund because you have still got 15, 10 years that you don't need those funds for."

She said it was about looking at the configuration of current investments to see if they were fit for purpose for when those funds would be used.

What about pre-retirees?

Shanks said those in generation X should put aside as much as they could afford to.

"Ensure you are in the correct fund. Understand when you are going to need those funds and what your risk tolerance is. Try and get the maximised return you can off the income you are earning now so it is working for your future."

More and more people are working past 65.

Shanks said not all could do that as some were in jobs that were physical and it was not practical for them to work past that age.