Keeping You

Money: Spending in retirement – two for the price of one

08 Nov 2018

Spending in retirement – “Where is the money going to come from to support our lifestyle and how much do we need?”

We love this question, it gets our juices flowing, but there is no one-answer-fits-all. The correct answer is: “It depends”.

Everyone is different.

They have different life styles, different bucket-lists of things they want to do before they die, different earning ability in older age, different costs (some still have young children or elderly parents to support, or both), different expectations. Some have mortgages still to pay off or rent to find every month. Some have old cars that need renewing. Others will never have to buy another vehicle. Some people have expensive hobbies. Some want to travel while others never want to climb into cattle-class ever again. Some have maintenance-free homes. The list is endless.

And then there is inflation.

At an average inflation rate of 3% per annum, a $5 bottle of milk will cost over $12 in 30 years and there is no guarantee that inflation will average such a low number over that period. Don’t forget, it won’t just be the milk that has gone up in price. Everything will have more than doubled in price, on average.

Luckily New Zealand Superannuation is (effectively) adjusted for inflation. That is a great benefit, taking the inflation factor out of our planning for a part, at least, of our spending problem.

There is also the question of how long we will live. If you are a couple, it is likely that one of you will live past the average expected age of death. Expect one of you to live beyond 90, even 95 or 100 is getting to be normal.

Do you wish to consume none, some or all of your spare capital? Do you have assets that you can sell if you need to, like a second home or bit of land?

Rather than working through an example and making lots of assumptions, lets look at a study done recently into the spending habits of over-65 New Zealanders. This was conducted recently by Claire Matthews, a researcher at Massey University’s School of Business, for the Westpac Massey Financial Education Centre and is an annual exercise.

Retirement Expenditure Guidelines
for year to 30 June 2017

Before we go into the detail of this very useful study there are some tips to help understand the results:

  • The study is not talking about ideal levels of spending; it is describing existing levels of spending during the year ending 30 June 2017 for all New Zealanders over 65.
  • The study lists the over-65s’ spending from the highest to the lowest and then divides it into five equal groups. Five groups containing 20% of the over-65 population each, ranked according to how much they spend in a year.
  • The second-to-top group have been given the label ‘choices’ lifestyle; the second to bottom group have been given the label ‘no-frills’ lifestyle (see diagram below).
  • The ‘choices’ group can afford to spend money on travel and eating out; the ‘no-frills’ group must be very careful about what they spend.
  • Half of the ‘choices’ lifestyle people are still working, either full or part-time.
  • It is assumed that everyone lives to 90 and consumes all their savings by that time.
  • It is assumed that the savings are invested in a balanced investment portfolio generating around 5% per annum after costs and tax, based upon 2% per annum inflation.
  • The study separates the results into single or twin households and again into either metropolitan and provincial areas. Metropolitan covers just Auckland, Wellington and Christchurch. Provincial covers the rest of New Zealand.
  • The results are a rough guide at best, but still, I believe, quite helpful, before taking your personal circumstances into account. The results are not a substitute for personal financial advice.
  • The results published below show the spending for that group on top of their New Zealand Superannuation income after tax. It is the extra spending they are doing after they have spent all their NZ Super payment. It then shows (roughly) how much money they would need to have invested in a balanced investment portfolio to generate that level of extra spending.

Spending Shortfall for Over 65s

2018 Spending top up for NZ Super

Note that all figures have been rounded off to the nearest 100 or 1000.

Reading the diagram, for a couple enjoying a ‘choices’ lifestyle in provincial areas, including Dunedin, Otago, Southland and rural Canterbury, they will need, on average for this group, around $450,000 invested at age 65 to generate a $500 per week top-up (inflation-adjusted) of their New Zealand Superannuation, assuming they both live to age 90 and they consume all their savings leaving only their house and contents to their dependents.

For the same couple in Christchurch, Wellington or Auckland, the corresponding amount is $700,000 generating a top-up of around $800 per week, inflation-adjusted.

One observation that sticks out is that it is much more efficient to live in a two-person household. For the same amount of money set aside to top-up their NZ Super, two people enjoy a similar standard of living as one person. It pays to go in pairs.

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