Do we really need to save $1.45m for retirement? – Mary Holm

“Here are the most recent figures for what it costs for the Choices lifestyle: We estimate that if you retired today, you’d need:

The percentage of the population with $1.45 million in savings (including NZ Super top up presumably) would be tiny in my opinion.

A: I agree that those totals seem way too high. Opes, like other financial providers, gives as a source for its numbers the Massey University Centre for Financial Education, or FinEd – although Opes numbers are higher than FinEd’s, which is hardly surprising given they want to encourage people to invest.

Still FinEd’s recently announced calculations, on how much people need to save for their retirement while receiving NZ Super, are themselves catching flak for being too high for people in some circumstances. And other research backs up that criticism. More on that in a minute.

The Fin-Ed estimates are for people living in a “Metro” area – Auckland and Wellington Regional Council areas and Christchurch City – and for “Provincial” people, who live elsewhere.

They are also calculated for people who are content to live a “No Frills” lifestyle and for those wanting a more expensive but not luxurious “Choices” lifestyle.

As the table shows, there’s a wide range of savings totals, from $48,000 for a single person living with no frills in the provinces to a hefty $1.142 million for a two-person metro household living with choices. The latter figure, in particular, has raised eyebrows – as has the huge difference between, for example, the Choices Metro savings for singles and couples.

Where did those numbers come from? The researcher, Massey associate professor Claire Matthews, used data from Stats NZ’s Household Economic Survey on how much people 65 and over reported that they spent. So, you could argue, the numbers can’t be challenged.

Enter the NZ Society of Actuaries, which late last year published research on spending through retirement. They looked at spending by New Zealanders 65 to 69, 70 to 74, 75 to 79 and so on. Their main finding is that New Zealanders spend less and less as they get older – with reduced purchases of clothing, transport, and recreation and culture in particular.

This means that, if inflation is about 2%, retirees don’t need to worry about their spending rising with inflation. Prices rise, but retirees buy less, so the dollar amount of their spending doesn’t change. Therefore, total savings needed at 65 could be a huge 40% less than other estimates.

The actuaries’ report says Massey’s guidelines – based on spending by everyone over 65 lumped together – “will overweight the higher spending of the more numerous newly retired”. About 30% of all over 65s are aged 65 to 69, but only 13% are aged 80-84, 7% aged 85-89 and 4% aged 90 and over. So the younger retirees’ spending will dominate the data Massey uses.

We should note, too, that these days almost half the people aged 65 to 69 are still working, full-time or part-time. And working people tend to spend more – on transport, work clothes, convenience food and so on, and also in many cases on non-essential items because they feel they can afford them.

“These guidelines may therefore suggest too high estimates of the savings balances needed at age 65 for retirement income,” says the Society. It recommends:

Matthews responds that “anecdotal evidence supports (the Society’s) findings that spending reduces in retirement as one ages. However, … most of the sums suggested for savings in the 2024 guidelines are not excessive (other than the one extreme case) and are achievable by many New Zealanders”.

She points out that most current retirees are mortgage-free homeowners, “whereas home ownership figures suggest future generations may not be so fortunate. Therefore, if a lower level of savings would be sufficient for current retirees, this may not be the case for future generations that are renting or still paying off a home loan.” It’s a fair point.

How much spent on what?

Q: “Rising costs put squeeze on retirees”. This was the headline on the front page of a recent NZ Herald. It refers to calculations provided by Massey University’s Fin-Ed Centre.

But it is not enough to simply provide total weekly expenditure. The breakdown must be provided so we can all compare our weekly costs with those that have been provided.

In May I will be 77 and live in a retirement village, and our weekly living costs are far lower than what Fin-Ed calculated. I realise that we do not pay building insurance and rates, directly, but we do indirectly via our weekly village fee. Our total living costs are approximately $30,000 a year, or about $577 a week.

It would be helpful if Fin-Ed would provide their tables.

A: The Massey report, which you can find at tinyurl.com/MasseyRetSpending, does include a breakdown of retirees’ spending in some detail in an appendix.

For example, it breaks down food into: fruit and vegetables; meat, poultry and fish; grocery food; non-alcoholic beverages; and restaurant meals and ready-to-eat food.

The two largest spends for all household groups are: housing and household utilities (15-35%) and food (14-23%), says report author Matthews.

You can compare your spending with the numbers in the appendix, keeping in mind that, the older you are, the less you are likely to spend.

Townies v rurals

Q: We are looking ahead to our retirement and are considering a move away from central Auckland for a more affordable lifestyle.

Could you please comment on living costs in our big city versus small towns in New Zealand? According to retirement calculators such as on sorted.org, our main centres are far more expensive to live in than regional towns.

However, I cannot see that differential. Apart from housing, basic costs such as insurance, food, petrol, power and other utilities etc seem to be the same. Rates tend to be even higher in comparison. I would appreciate your view.

A: The Sorted Retirement Calculator uses the FinEd data. And, as our table shows, provincial households do usually spend less in retirement than metro households.

However, oddly, couples with a No Frills lifestyle are spending more in the provinces. Matthews notes this, and says the main differences are spending on recreation and culture, and, to a lesser extent, transport. It seems rural retired couples are out there having fun!

More broadly, if you compare metro and provincial spending in the appendix mentioned above, it’s hard to draw any conclusions. In one set of circumstances, townies spend considerably more on something. In another, the more rural folk do.

One eye-catcher: provincial single-person No Frills households spend more than three times as much on booze as their metro counterparts. But when we look at Choices households, they spend just 25% more. Make of that what you will!

The trouble is that each of us has different spending priorities. If you look at that appendix and apply it to how you spend your money, you might be more enlightened.

Two final points:

· After all this discussion, how much do we really need for retirement? As I’ve said before, a good rule of thumb is that for every $100,000 of savings, you can spend $100 a week — or $5,200 a year — and your money will probably last from 65 until you die.

This is fairly consistent with the NZ Society of Actuaries’ four Drawdown Rules of Thumb at tinyurl.com/NZRetire. They discuss the pros and cons of the different rules and which ones suit which people. I recommend looking at that.

· A recent article in the Australian Financial Review, headed “Relax, here’s why you don’t need that much super”, quotes experts saying the Association of Superannuation Funds of Australia’s estimates of what’s needed in retirement are too high.

Their numbers for a “comfortable” retirement: A$690,000 ($762,470) by age 67 for a couple. For a single it’s A$595,000 ($657,493). They assume mortgage-free home ownership, and receiving the age pension.

While the Aussie situation is somewhat different from ours, those numbers feel more realistic – and several Australian experts say they should be lower.

“Unbelievable”?

Q: I couldn’t help but notice that a reader wrote last week asking for advice about his finances. He’s allowed to stay in his late wife’s home for five years with four years to go, and seeks advice on buying a home with his new partner. Poor wife’s only been dead one year and he’s moved on to a new partner already, unbelievable.

A: Now now! As Kate Winslet apparently said, “It’s very easy to be judgmental until you know someone’s truth”.

Perfect tax?

Q: With reference to the letter about tax rates last week, I have a view on the graduated tax scale for individuals.

If a flat tax rate were to be implemented, the way to make it fair for low-income earners is to have the first few thousand dollars of income tax-free. We would still have a graduated tax scale, from 0% tax for those under the threshold, to nearly 20%, say, for those on high incomes.

It seems to me that there is an enormous non-productive industry in NZ and other countries for those on higher incomes, using various means (trusts, companies, income-splitting, etc.) to minimise tax.

I remember how successful GST was when it was implemented. It’s a flat rate, very hard to avoid, and it brought in more income than initially anticipated.

I suspect that a flat tax rate would have a similar success. In fact, it might be lower than initially anticipated, just to bring in the same amount of tax as under the present graduated system?

A: But is it fair for a wealthy person, who has a part-time job just for fun, to pay zero tax? Even under the current system, they get off lightly.

And GST has its faults. Not only does everyone, rich and poor, pay the same rate, but poorer people tend to spend all their income, whereas wealthier ones save some, so GST hits the poor ones harder.

There’s no such thing as a perfect tax system!

For the grandkids

Q: I wanted to share the financial plan my wife and I created for our grandchildren.

At birth, each grandchild receives a $10,000 gift. Every year thereafter, we contribute an amount matching their age – $1,000 at age one, $2,000 at age two, and so on. We intend to continue this until they turn 21, as long as one of us is around. This annual contribution serves as their birthday gift.

In the meantime, the funds are invested in ETFs, growing over time. When they come of age, they can use the money for education, buying a home, or traveling.

We’re fortunate to be in a position to do this, but the core idea is adaptable — any amount can work.

A: Good plan. And, as you say, it could be $10 at age one, $20 at age two and so on.

Just a note on your continuing the plan “as long as one of us is around”. You might want to include in your wills that if both of you die before the money is handed out, it should be adjusted so all grandkids get the same amount. There’s nothing like uneven legacies to start ill will within a family.

One more thing: I hope you also give the little ones a toy for their birthday. Money for preschoolers usually means little.

* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.