Now's the Time to Get Smart with Your Savings so You Can Enjoy the Rewards in Retirement
These days, it’s likely many of us will spend nearly as long in retirement as we do in employment. So it’s important to consider how each of us will generate an income to ensure our lifestyle continues to be supported in a comfortable way.
When regularity of income from personal exertion finishes, it shouldn’t mean the end of life as we know it. Granted, there may be some financial adjustments required (like only buying one bottle of quality wine per week instead of three), but the entire purpose of forty years of hard graft should not be wasted at this next stage – it should really be the start for each of us of our new good life.
This new good life requires some financial support that will need to be sourced from capital at work. Retirees can expect a minimum safety net from the government but greater quality of life is probably going to come from additional income. This is where the benefits of longer-term planning come into their own. But of course, how much is enough and from where exactly will it be derived?
Many of us will naturally take a more conservative approach to investing at this time of our lives. That is understandable, but what does get overlooked is our longevity. If we did take a totally conservative view, our funds would be only invested in bank deposits and fixed interest (bonds). Those sectors would be fine if we only had another five years to live; however, our time in retirement is increasing. This means we should also have growth investments to enable our capital sum portfolio to keep up with, or ahead of, inflation. After all, it’s the total financial portfolio that is going to underpin the enjoyment of our time in retirement.
So, here’s the conundrum – do we stay totally conservative (often incorrectly referred to as “safe”) with our funds? Or do we keep a prudent allocation in growth funds so as to assist with portfolio longevity (and hopefully match our longevity)? Certainly as the majority of cash flow or income producing assets belong to the fixed interest sector, it becomes easy to overlook the fact that growth investments can also provide a dividend return to assist cash flow. A prudently arranged portfolio will reflect all of the available sectors, but at a level that is comfortable to each of us. But, how much is enough?
This question requires an individual answer every time, but let’s assume for our purposes that we need an additional income (over and above the national superannuation) of $30,000 net per annum for 20 years. Obviously, we would like that sum to remain relevant by taking inflation into account and expecting the average return to be around say 3% after inflation. We would therefore need to have a capital base of approximately $450,000. If we simply use this capital as a top up, it would mean that after about 20 years, there would be zero dollars remaining – nothing left for continuing the new good life, or to leave for someone to inherit.
Now, in order to build up to a capital sum of $450,000, we need to save $13,610 per annum for 20 years (assuming a 5% growth rate in the portfolio after inflation, and a zero starting base). Many of us are partially on the road to achieving these levels by being part of a KiwiSaver scheme, but additional funds may still be required to be put away.
A good life, at all stages of our lives, is achievable by us all, but we need to be aware of the need for qualified and experienced financial advice. We cannot guarantee longevity of life, but we should try to ensure longevity of our portfolio to support that time.
If you would like to discuss your retirement plan with a Trustees Executors Private Wealth Adviser, contact us for a no obligation discussion on 0800 878 783, email firstname.lastname@example.org or visit our website www.trustees.co.nz
(All figures quoted are in today’s dollars and not adjusted for inflationary trends).