How Much Do You Need To Retire?

Is NZ super enough to retire on?

And what if that money runs out before you do?

Let’s take a look at the retirement landscape in New Zealand, and bust some myths about the best way to plan for retirement.

In New Zealand, we’re lucky to have a universal superannuation plan. Once you hit 65, you’ll receive a chunk of change every week, no matter who you are or how much you earn. All you have to do is be a legal resident of New Zealand, have lived here for at least 10 years (20 years as of July 2024), and be over the age of 65. There are some other situations where you can qualify for it – we recommend reading up here for the details.

The precise amounts that NZ Super pays out varies from year to year, with the Government setting different rates in accordance to economic changes.

At the time of writing, NZ Super pays out about $24,000 a year to a single person living alone and about $36,000 a year to a qualifying couple.

While NZ Super certainly helps people in retirement, the reality is that it isn’t usually enough to live on alone – even if you live somewhere inexpensive.

According to the most recent Retirement Expenditure Guidelines report from Massey University, retirees on average spend between $70 to $600 (!) more every week than they receive from superannuation, varying depending on their location and their lifestyle.

In other words, even people who live very frugally, in an inexpensive part of New Zealand, will find that superannuation falls short of their actual living expenses. So chances are, you’ll need some extra to make up the difference.

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How much do I need to retire?

You might’ve heard things like the “80% rule” or the “4% rule” or some rules of thumb like that when it comes to how much you need to retire.

We’re here to tell you that traditional approaches might’ve worked once upon a time, but these days, they’re quite outdated! They might even lead you to make incorrect conclusions about how much you’ll need when you retire.

Let’s take a look at the traditional approach and compare it to how we do things.

The Traditional Approach

According to the traditional approach to figuring out how much you’ll need to retire, you first decide when you’re going to retire, and then guess how long you’re going to live for after retirement.

For example, lots of people work until they turn 65, the age of receiving NZ super, and the average life expectancy is 85. So you’re going to need to fund your retirement for about 20 years.

Next, you need to figure out how much you’d like to live on each year. If you can live purely on the pension (which we’ve shown that most people can’t), then great. You’re good to go.

If you’re used to living on more, then you need to determine how much you need each year, subtract the pension from that amount, and that will tell you how much you’ll need extra.

Example

You currently live on a household income of $100,000 a year, and you’re comfortable with that. You know that, as a qualifying couple, you’ll get about $36,000 each year from the pension. This leaves $64,000 extra you’ll need to have saved for each year after retirement.

20 years of retirement means $64,000 multiplied by 20, leaving us with your final figure: $1,280,000. This is how much you’d need in savings by the time you retire to fund your desired retirement.

Sounds reasonable? Not so fast. This approach has some pretty significant flaws that make it a poor representation of your retirement savings goals. Here are some questions to ask yourself before accepting that figure.

• What if you live past 85?

The human body doesn’t have a best-before date! There’s a chance that you (or your partner) will live past 85 and you won’t have anything saved up to account for that. This means you become completely reliant on the pension or you’ll become financially dependent on your children or family.

As a result, people who adopt this approach end up living very frugal lifestyles because they’re worried that their nest egg will run out before they do.

• What about inflation?

The traditional approach to figuring out your retirement savings goal doesn’t take into account the effect of inflation. Every year, the cost of living increases, usually by between 2 and 3 per cent. This means that everything gets more expensive: milk, bread, petrol, rates, insurance; everything.

Between now and by the time you retire, that $100,000 a year won’t buy you the same things that it does today. It won’t afford you the same lifestyle.