Retirement Life
21 April 2022

Money management in retirement


Liz Koh looks at the problems with budgets and shows how we can get a better handle on our daily living expenses.


One of the scariest aspects of retirement is the change in fortnightly income. Massey University research shows that no matter where you live or how frugal you are, NZ Superannuation is just not enough to live on. It certainly helps if you are living in a rural area rather than a city, and it is critical to own a debt-free home, but the key to living well in retirement is to manage your living expenses in a very disciplined way.

Money spent on living expenses – food, power, phone etc. – is money that is not then available to spend on the fun things that make retirement enjoyable. The lower you can drive down your living expenses, the more you will have to spend on the things that really matter to you.

We have around two years of higher than usual inflation ahead of us, which will make budgeting even more important.

The problem with most budgets is that they don’t work. There are several good reasons why. To start with, they require a lot of time and effort to put together, especially if they are detailed. Next comes the difficulty of tracking actual income and expenditure against the budget. This requires either a very large spreadsheet and a lot of data entry, or software that takes bank account transactions and sorts them by budget category. All this is very time-consuming.

Perhaps the biggest problem with budgets is they don’t change behaviour. They are usually constructed using previous patterns of expenditure as the starting point, so these patterns become entrenched. There is often very little correlation between budgets and goals. The approach is ‘bottom up’ with the focus on making sure the expense items, when added together, come to a sum that is less than income, rather than a ‘top down’ approach beginning with long-term goals. The incentive to change short-term behaviour in order to achieve long-term goals is therefore lost or diminished.

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Budgets are mostly about managing expenses; however, it is managing the flow of income that is of prime importance. Budgets work best when you make conscious decisions in advance about what you are going to spend your money on and channel that money into expense categories.

The first decision you will need to make is how much of your total financial resources will be allocated to covering living expenses (the cost of being alive) rather than your longer-term retirement goals (the fun stuff!).

Daily living expenses fall into three categories – expenses you are committed to (for example, rates, insurance premiums), expenses that are entirely discretionary (for example, entertainment or gifts) and expenses which are essential but over which you have some control of how much you spend (for example, food and transport). Financial commitments are usually a known amount and easy to quantify. After deducting these from your expected fortnightly income, it is simply a matter of deciding how much to put into each of the other two categories. That is a matter of personal choice.

For the money management system to work, each of these three categories of daily living expenses needs to be managed in a separate bank account, one of which will be the main account into which your income is paid. Your income will comprise NZ Superannuation, Lifetime Income, or money from other investments, and any employment income. Funds should be transferred from the main account into the two other accounts each fortnight.

Ideally, financial commitments should be paid by direct debit or automatic payment. Because they are known amounts, it is easy to set aside sufficient funds to cover them. With the payment systems in place, they will take care of themselves with only the occasional review when the payments change due to price increases. It is important that this account does not have EFTPOS access so as to ensure funds are always available for bill payments. The remaining two accounts, covering discretionary expenses and essential expenses, should be accessible by EFTPOS.

Within a relationship, the essential expenses account can be joint, and each partner should have their own discretionary expenses account. This is especially important when people have different money priorities as it is a way to avoid conflict. Having an agreed amount that can be spent without consultation with another person is essential to a harmonious relationship.

Managing your money in this way will help you keep your expenses within your available financial resources and therefore reduce your financial stress.

Photo of Liz Koh
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.

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