Suggestions that even million dollars
may not necessarily buy you long and carefree retirement are likely to send many people into panic. The magical Lotto-like number may sound ample to banish your money worries and fulfil your retirement dreams – but times are changing.
Aside from inflation – factor in some poor investment returns, longer life span, changing attitudes to third age living, uncertainty over continued government hand-outs – and the figure starts to lose some of its magic.
However on current basis, it’s safe to say that very small percentage of New Zealanders are likely to have seven figure number to invest when they retire. You’d have to save $10,000 year for 40 years on real return of four percent to end up with $1 million and in country where the average income is $38,000 per annum this would be deemed to be privileged position.
How much money you need to retire on of course depends on number of variables. Have you been used to living on $200,000 year or the minimum wage? Are you going to live in Remuera or Raglan? Will you own your own home or be renting? At what age do you intend to stop working?
Experts say that as rule of thumb you need around 75 percent of your pre-retirement income to maintain your standard of living. You might not spend anything on travelling to work but your medical bills are likely to be bigger. And while you might not need business suits, you may want to have someone come in to mow the lawn!
Calculations are obviously based on intended age of retirement, predicted life-span, how much money you need to live on, whether you own your own home and where you intend to live. But whatever the calculation, million dollars isn’t what it used to be.
Statistics show that major percentage of adult New Zealanders are making no provision for retirement and according to Roger Perry, chief manager of ASB Investment Services, most don’t start any sort of retirement savings plan until they’re around 40. So with the million dollar goal in mind, based on today’s dollars and assuming 1.8 percent inflation rate, Perry provides two scenarios:
If you are currently 40 years of age and want to retire at the age of 65 with lump sum of $1 million you should be saving $19,198 year or $1600 month – that’s using an after tax and fees return of 5.63 percent per annum. Using the return from that example and including inflation at 3.8 percent per annum, you’d need to be putting away $24,666 per annum or $2055 each month for the next 25 years.
If you retire at 65 and say, live for 30 years with lump sum of $1 million which you put into conservative strategy, return of little over three percent would give you just over $51,000 year to live on.
Currently one third of New Zealand superannuitants have retirement incomes of less than $11,140 year and on average depend on New Zealand Superannuation and Social Welfare benefits for 98 percent of their income. Yet while 77 percent of New Zealanders are concerned that they won’t have comfortable retirement, 27 percent of adults between 20-64 are not doing anything about it. Looking ahead 20-30 years, 33 percent of New Zealanders think New Zealand Superannuation will only be paid as safety net, 32 percent believe it will be paid depending on savings and income and 11 percent believe there won’t be any NZ Superannuation.
In 30 years the number of New Zealanders aged 65 years and over will more than double to almost one million and at the same time for every working-age person there will be twice as many people over 65. The impact of the baby boomers retiring will provide major challenge and it’s apparent there’ll be some belt tightening at both national and personal level.
The message about taking personal responsibility to invest for your retirement has been slow to penetrate despite statistics, and the perception that you need to be wealthy to invest, still persists. But as most investment managers will tell you – you don’t need much to get started, just plan and goal –the important thing is to start somewhere because even small investment will yield great rewards over time.
The assumption that we will all be working through until we’re 65 is also getting more tenuous. Wellington economist Dr Gareth Morgan points out that peak income-earning years are falling from late 50s to late 40s. “People are living longer but their career paths are coming to an end earlier. There are two ways out of the vortexÉ you have to save and invest better and you have to invest in keeping your skill sets current. Don’t get down such narrow channel that when the boss gives you the white envelope, you’ve got nowhere else to go,” says Morgan.
On savings and investment, Morgan says it’s not just about saving heaps, but more about clever investment. “Don’t put it all on one nag! It is really important to spread the investment. This is one of New Zealand’s big problems – there is no evidence that this country hasn’t saved enough, but there is lot of evidence to show that we haven’t invested cleverly. It’s important to learn about risk, look at diversification – minimise exposure to any one particular theme. People have this big misconception that because they’ve worked hard they should surely be able to sit back and enjoy it. But unwise investment means many of them start to lose the money at 10 times the speed at which they earned it,” says Morgan.
Getting proper advice on finance and investment may make good sense, yet investment managers are full of horror stories about people who’ve tried the DIY approach and lost everything. Not only have many come to grief by putting all their eggs in one basket, but others are losing out because of poor money management. Anthony Thyne, chief investment officer with the BNZ, says it is false economy not to invest in some good advice.
“It is frightening to hear how some people think they should organise their affairs. New Zealand is DIY society but it makes sense to spend few hundred dollars to have carefully trained, well accredited adviser look to see if you’ve got your financial affairs in order,” says Thyne.
BNZ general manager of investments and insurance Roger Murphy says New Zealand has tried to improve in this area in the past couple of years and there has been more focus on accredited advisers who are better skilled. “They understand time frames and risks which investors don’t necessarily think about in logical way.
“The basics are not hard to learn – there are some simple rules about diversification and balance of growth but it’s discipline that lets people down and bewilderment about the array of choice,” he says.
Gareth Morgan has advice for potential investors wanting to check out the credentials of an adviser: “Ask them how rich they are, how much money they’ve made. If they say they only joined the organisation last month then avoid them like the plague. Don’t get buried by marketing hype, an adviser should be working for you, not the vendor of product. Investment is about knowledge and lot of vendors of products are not interested in you having any knowledge,” he says.
How New Zealanders invest their money is interesting. We’re keen share investors by international standards. Over four in 10 New Zealanders (44 percent) have some form of direct investment in shares compared with 54 percent in Australia, 40 percent in the UK and 25 percent in Germany. The latest New Zealand Stock Exchange survey shows that while New Zealanders are keen on direct investment they have proportionately less investment in products such as managed funds and superannuation but more money invested in property.
There’s little dispute that properly managed portfolio is the way to go especially if you want to get anywhere near that magical million. And given the current value of the NZ dollar advisers say they strongly promote at least some offshore investment.
Morgan: “New Zealand is very small – floatin