Want to have a comfortable retirement? Here's how

Tuesday, 7 March 2017

Are you on track for a happy retirement?

Retirement - whether it's at 65, 67 or some other age entirely - probably seems a long way off.

But if you can get on track now, your future self will thank you for it.

Here's how to get sorted for retirement in five easy(ish) steps.

1) Work out how much you will need

Chances are, your idea of an ideal retirement lifestyle will be quite different to your neighbour's, or maybe even your partner's. Work out what you want your retired life to be like - do you want to travel? Go out to dinner regularly? This will affect how much you need to save.

* Gen Y MPs at odds over raising the retirement age**

Financial adviser Shula Newland said people needed to think about what age they wanted to stop working. Some people were set on retiring at the pension age because that was expected, some had a life goal to retire sooner, and others wanted to keep working because they could not imagine being out of the workforce.

How much each person needed to save would be different, Newland said.

Massey University's study of retirement spending found a single person living in a metropolitan area with a 'choices' lifestyle - including things things like going out for a meal, not buying the cheapest cuts of meat, doing some travel, or going to the movies or theatre - needed $754 a week. For a 'no frills' lifestyle, $490 was needed.

For $754 a week over 20 years, you need to save a lump sum of $600,000. That assumes a return after tax, fees and inflation of 3 per cent per year.

Financial adviser Michael Dowling, who is president of the Institute of Financial Advisers, said this was the biggest factor in retirement planning. 'Work out what your expenses are, what will probably carry over into retirement and what won't. That helps advisers or people who just want to look at the Sorted calculator, to work out how much they have to save.'

2) Sort KiwiSaver

Get your KiwiSaver settings right so money can accumulate there without too much effort on your part. At the very least, you should contribute 3 per cent of your pay, you should collect 3 per cent from your company if you are employed and you should contribute at least $1042 a year to get the full Government contribution of $521.

There are lots of reasons why you might consider saving more. If you are saving a deposit for a house, contributing 8 per cent of your income is a much faster way to accumulate the funds, and the money is locked up safely.

If you do not think you will ever own a house, contributing more to KiwiSaver is important because you need to have more saved to cover the cost of renting in retirement. If you find your circumstances, or the market change, you can still tap into it to use the money as a deposit on a first home.

Newland said even low-income people would probably find they were able to accumulate enough in KiwiSaver eventually to buy a property.

3) Sort out your cost of housing

One of the best indicators of the quality of a person's retirement is whether they live in a mortgage-free house. If you have a mortgage, get some advice on how to pay it off more quickly. Especially at the beginning of a mortgage, extra payments will save you a huge amount in interest costs.

'Assuming you have a house, you're looking at building your wealth by paying down the mortgage more quickly or investing elsewhere,' said Newland.

'A lot of people find it easier to pay down the mortgage because they don't have to worry about investing. It depends on what your commitments are, whether you have kids or not, but if you put your head down most people can get a mortgage paid off in 10 years. It's not rocket science, just increasing your payment when you can.'

She said people should also consider how much of their wealth they wanted to hold in their house. Some were happy to bank on being able to downsize to free up money when they retired but others were not. Often, people had to be prepared to move region as well as house if they wanted to access a significant amount of the value of their houses, she said.

'Some people are happy to retire in a bus. People have different visions for retirement.'

If you do not yet own a house but want to, work out when you will be able to get there and how much extra you need to save to do so.

4) Get rid of debt

Pay off all your short-term, expensive debt - your credit cards, hire purchases and other consumer debt. This means any extra money you have left over can go into your 'life after work' fund.

5) Start investing

Once you have cleared your debts, you can look to invest more money. This could mean putting more into your KiwiSaver fund. KiwiSaver is good for people who lack discipline because the money is tied up. It is professionally managed and managers have limits on what they can charge.

But Dowling said it would not suit everyone. 'KiwiSaver is an efficient model to save in but you don't get that flexibility and choice.'

Another option is a managed fund. These operate in basically the same way as KiwiSaver but the money is not locked in.

You could also buy a rental property, and aim to clear the mortgage in time to live off the rent in retirement. Make sure you factor in the time and financial cost of dealing with tenants and maintenance.

Dowling said, in some cases, it was sensible to start other investments before paying off the mortgage on your own property.

He said while paying off a home loan would save interest costs, people could miss out on investment returns that would then compound over decades.