19 August 2020

How much money do you really need to retire?

In the light of falling investment returns, many people approaching retirement are wondering if they will ever be able to afford to stop working. The last few years of working life, after paying off the mortgage, are the years when the focus is on building up savings for retirement. Low investment returns certainly have an impact on how quickly a nest egg increases in value, leaving many near-retirees disappointed with the value of their investment portfolios and wondering whether they will have enough.

So how much money do you need to be able to retire comfortably? It depends! There are a number of factors to be considered.

At what age do you intend to retire?

It is increasingly common for people over the age of 65 to keep working, either full-time or part time. The age of retirement is not 65, it is the time at which you begin using your investments to provide money to live on. Obviously the longer you keep working, the shorter your retirement will be and the less money you will need.

How much money do you need to cover your weekly living expenses?

Some people live a lot more frugally than others. In retirement, assuming you are living in a mortgage-free home, your biggest weekly expense is food. A champagne and caviar lifestyle can significantly increase your weekly expenses and therefore the amount of money you need to fund your retirement. Spending on non-essentials such as entertainment and expensive clothes can blow your budget, leaving you less to spend on other, more important things.

Every year, Massey University researches the weekly living costs for singles and couples in retirement. The research shows a big variation in spending with some couples living on not much more than NZ Superannuation and others spending up to $800 a week more.

Where do you live?

Living in a big city is much more expensive than living in a provincial town. The cost of housing, including rates and insurance, is generally higher in cities, then there are increased transport costs, and the different lifestyle. Life in a provincial town offers fewer temptations and less peer pressure to spend. The Massey University study shows that city couples spend around $300 per week more than those in provincial areas.

What are your spending plans for ‘big ticket’ items in retirement?

Prior to Covid-19, travel was top of the list of spending priorities for most retirees. However, not everyone wants to travel and those who do, have different preferences. Some prefer to stick close to home, making small, less expensive trips throughout Australasia and the Pacific Islands, while others may have family living in Europe and the UK to visit at a much greater cost.

Other ‘big ticket’ items include new cars, campervans, home renovations (kitchen and bathroom) and home maintenance (particularly painting and landscaping). There is an element of choice in how much you spend on all these things.

How healthy are you?

Your health status can have a big impact on your spending. The middle stage of retirement can see health costs soar through GP visits, medication, hearing aids, glasses, dental care, and the cost of specialists and surgery in private hospitals. Looking after your health and fitness will cut down on your health costs.

How long do you expect to live?

It’s great to have longevity in your family genes, however the longer you live, the more money you will need! Statistics show that the average person retiring now can expect to live to about ninety, however women still outlive men, and about half of all people will live longer than the average person.

Are you prepared to use up your retirement nest egg over the course of your retirement?

Most retirees these days aren’t too worried about leaving any more for their children and grandchildren than the house they live in. If you are prepared to use up your retirement capital rather than live off the investment income you will need a lot less in your nest egg.

Taking all these factors into account, you can see that the answer to the question of how much money you need in retirement can vary widely from one person or couple to the next. You can also see that the choices you make about your lifestyle are important and by choosing wisely, you can live comfortably in retirement.

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Written by:

Liz Koh

Liz Koh is a money expert who specialises in retirement planning. The advice given here is general and does not constitute specific advice to any person.