Retirement planning a moving target

The guidelines, produced by Massey’s New Zealand Financial Education and Research (Fin-Ed) Centre, assists pre-retirement New Zealanders in making financial plans by providing information about actual levels of expenditure of those already retired.

Levels of expenditure by current retirees are categorised into ‘no frills’, reflecting a basic standard of living with few to no luxuries, and ‘choices’, which represents a more comfortable standard of living. Cost calculations are conducted for both metropolitan and provincial areas, across one-person and two-person households.

The projected lump sum savings needed to support a two-person ‘no frills’ household in an urban setting now sits at $235,000, and $120,000 for a similar household in a rural area. A metropolitan two-person ‘choices’ household would require $831,000, while their provincial counterparts would need $539,000.

As households continue to spend at levels in excess of NZ Superannuation, report author Associate Professor Claire Matthews says New Zealanders need to consider the changing economic environment to determine the savings they need to achieve their retirement objectives.

“While inflation has fallen compared to 12 months ago, it’s still higher than recent experience and cost of living remains a big issue. The upcoming election is also likely to impact retirement planning, with party policies both directly and indirectly affecting the economy and individual’s financial situations. Most New Zealanders aspire to a better standard of living in retirement than can be supported by NZ Super alone, so it’s important to remember that the context in which retirement planning takes place is not static. Regularly reviewing your retirement plans in line with external factors is a must.”

The report shows that in the past year, the growing difference between NZ Super and weekly expenditure has been felt by all retirement household groups. The increase reflects the higher rate of inflation and shows these households must rely on other incomes, savings and/or drawing down on investments to bridge the gap.

The key inflationary drivers for superannuants over the last 12 months include food, recreation and culture, housing and household utilities and insurance for all household groups.

Food remains one of the largest expenditure classes for the households, accounting for 12 to 22 per cent of total expenditure. The Consumers Price Index (CPI) increase for food was 12.3 per cent, more than twice the overall CPI of six per cent, and as a result, food was a notable contributor to increased expenditure, making up 35 to 43 per cent of the total increase.

Although the increase in insurance expenses had a relatively smaller impact, it accounted for six to nine per cent of households’ total expenditure. This contrasts with its weight of 2.94 per cent in the CPI, resulting in an average of 8.9 per cent of the overall increase in household spending.

While most of the household groups experienced expenditure increases below the six per cent CPI inflation rate, it’s important to note that CPI uses a standard basket of goods and services which may not align with the spending patterns of individual households.

Dr Matthews says the focus on retirement preparation is increasingly shifting to Generation X.

“The first of this generation will be reaching the age of eligibility for NZ Super, the widely viewed retirement age of 65, in just seven years. This means in the next seven years, the last of the Baby Boomer generation will reach that milestone. While it is still more than 20 years until the first of the Millennials reach that age, it is not too soon for them to start thinking about their retirement.”

The report focuses on expenditure in retirement and necessary savings, but Dr Matthews says there is other work in progress which offers valuable insights to assist with retirement preparations.

“While making financial plans for retirement is important, there are other matters to consider which may affect those plans. In this year’s report, there are recommendations for three publications on ageing, drawdowns and retirement villages which I encourage New Zealanders planning their retirement to engage with and use in the development of those plans.”

Recommended reading:

• Ageing in Aotearoa is a new book from the Health and Ageing Research Team (HART) at Massey University which summarises key findings from the New Zealand Health, Work and Retirement (NZHWR) longitudinal study focussed on the ageing journey that began in 2006.
• Drawdown Rules of Thumb is a recent update from the Retirement Income Interest Group (RIIG) of the Society of Actuaries.
• Review of the Retirement Villages Act 2003 is a consultation paper from Te Tūāpapa Kura Kāinga – Ministry of Housing and Urban on options for change to the retirement village sector.

Financial support to produce the Retirement Expenditure Guidelines report was provided by Financial Advice New Zealand and financial advisor firm Consilium.

About the Retirement Expenditure Guidelines

Established in 2011, the New Zealand Fin-Ed Centre’s mission is to enhance the financial welfare of New Zealanders. The report’s findings are derived from data gathered from Statistics New Zealand’s triennial 2018/2019 Household Economic Survey. These guidelines do not represent recommended levels of expenditure, but reflect actual levels of expenditure by retired households.

Access the complete report here.