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A DIY approach to retirement planning

If you can't afford to go to an independent financial advisor, there are still many free tools to help with retirement planning.

By Dr Pushpa Wood and Dr Malcolm Menzies

How much should I save for retirement? It’s a question that often freaks people out – but that doesn’t need to be the case because there’s plenty of free help at hand. The Westpac Massey Financial Education (Fin-Ed) Centre has just released its updated Retirement Expenditure Guidelines, which give achievable options for how much to save to enjoy different retirement lifestyles. 

At the same time, the New Zealand Society of Actuaries has published some useful “rules of thumb” to help retirees decide how much of their savings to spend each year. And the Sorted website still has the best free and independent tools to help you work out a personal target and a plan.

In an ideal world, we’d all get professional advice to help plan for our retirement. But there are currently about 1500 KiwiSaver members for every one Authorised Financial Adviser in New Zealand so, realistically, most will have to do a bit of DIY financial planning. The three sources of information mentioned above would be a good start for anyone contemplating their retirement finances.

Westpac Massey Fin-Ed Centre director Dr Pushpa Wood.

The gap between NZ Super and retirement expenditure

There’s also a need to put to bed the myth that New Zealand Superannuation “won’t be around by the time I retire”. There’s no reason to believe that there won’t be a public pension in the future. While there is a real cost related to the large cohort of baby boomers moving into retirement, New Zealand Super can remain affordable, especially if the age of eligibility is raised.  

Given the voting power of older New Zealanders, it is highly unlikely that any future government will scrap the scheme. People of all ages currently planning for their retirement should feel safe factoring in the income from New Zealand Super. Indeed, for some retirees, it might be all they need.

The Westpac Massey Fin-Ed Centre Retirement Expenditure Guidelines use statistics on actual expenditureby retirees and calculates what they currently spend to maintain either a ‘no frills’ retirement, or a more fulfilling ‘choices’ lifestyle that includes some luxuries. Costs are calculated for one and two-person households in both metropolitan (Auckland, Wellington and Christchurch) and provincial areas.

From there, the guidelines show the gap between what New Zealand Super provides and the desired level of weekly expenditure. That gap can then be used to estimate a target lump sum for retirement and a savings rate, depending on the age you start. The weekly savings figure in the table below would be for a person starting to save at age 50; the amount becomes significantly lower if you start earlier in your working life.

*Figures from the Westpac Massey Fin-Ed Centre's Retirement Expenditure Guidelines.

Making your retirement income last

To work out a plan that is more tailored to your specific needs and to cross-check with the Retirement Expenditure Guidelines, use the retirement planner on the Sorted website. Sorted is free and independent – it’s run by the Commission for Financial Capability and funded by the Government.

Once you know your savings target, check out the Society of Actuaries’ “rules of thumb” to estimate how much income you can draw down from your retirement savings (decumulate) each year, depending on how long you want your savings to last. There are four rules of thumb to choose from, each suited to different objectives for retirement income. 

*Figures from Society of Actuaries "Rules of thumb" for decumulation.

Retirement planning is a lifelong process

These rules of thumb give general guidance only. They are simple principles that are generally reliable in the absence of full advice, and provide a broad steer on how to achieve a financial goal. Nothing in the table below (or indeed this article) should be taken as financial advice or as a recommendation for how any individual should manage his or her money.

Planning for retirement is not a case of “set and forget”. Objectives and strategies need to be regularly revisited in the light of changing circumstances. Professional advice can’t substitute for personal financial capability, which is a lifelong process. What you need to know at the age of 15 may not be same as at the age of 25, 45 or 55, and there are free tools that can help you to plan at every life stage.

Indeed, the best time to seek professional advice might be later in life when you have a growing “pot” to invest or protect. In the meantime, some DIY planning is far better than nothing at all.

Dr Pushpa Wood is the director of the Westpac Massey Fin-Ed Centre and Dr Malcolm Menzies is an independent writer on retirement income policy issues. He also produced the Retirement Commissioner’s 2013 review of retirement income policies.

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