Tue, 01 Feb 2011
How much income do you think you will need to live on in retirement?
How much New Zealand Superannuation will the government pay (“NZ Super”) and how much extra money will you need to find to “top up” your earnings to obtain your desired income?
The difference between what the government pays as your NZ Super and your target retirement income is your retirement income gap.
KiwiSaver was designed as an incentivised long-term savings scheme in order to help New Zealanders fill the retirement income gap. It was recognised in the design of KiwiSaver that NZ Super would not be enough by itself for more than a minimum standard of living, and that something more had to be done to encourage people to save for a better quality of life in retirement.
The IRD recently had the public polled on what they thought their retirement income would need to be, and some surprising results came up.
But first, here are some questions for you. Jot down your answers and compare them with the answers that follow.
Question time
a) NZ Super
1) If you were single and living alone on NZ Super, how much would that benefit pay you as an individual per year (at current levels)?
2) If you and your spouse or partner were both over 65 and receiving NZ Super, how much would that benefit pay you as a couple per year (at current levels)?
b) Total retirement income
3) In today’s dollars, how much income per year (before tax) would be enough for your household to “get by” on in retirement?
For example:
a. Earning just enough income to make ends meet
b. Being able to pay the rates and other basic household bills as they came in
c. Being able to afford to run a modest car
4) In today’s dollars, how much income per year (before tax) would be enough for your household to be “comfortable” in retirement?
a. Earning sufficient income to afford some “luxuries” like dining out in a nice restaurant
b. Being able to afford a regular annual holiday trip
c. Pursuing sports, hobbies and interests
d. Being able to pay for periodic home maintenance and renovations
Answer time
Question 1: Annual NZ Super income, single person living alone
You would be earning $19,425.12 per year before tax ($373.56 per week gross).
Question 2: Annual NZ Super income, couple both aged over 65
You would be jointly earning $29,184.48 per year before tax ($561.24 per week gross).
There are other NZ Super rates that apply depending on personal circumstances. The table of these rates is found on the Work and Income website.
Questions 3 and 4 on “getting by” and living “comfortably”: These last two questions need to be answered together with reference to the IRD’s annual report on KiwiSaver.
If you were not able to answer Questions 3 or 4, you are not alone.
The IRD’s report found that of those surveyed, “Almost half (46%) of individuals could not specify a value of the level of income they expected to have in retirement, and one-fifth could not provide a value for the level of income they would need ‘just to get by’ or to be ‘comfortable’ in retirement.”
Of those who did make a stab at guessing, the report found that, “Of those who could provide values, the median annual income level households expected to have in retirement was $45,000, the median annual value that households thought they would need to ‘just get by’ was $39,000 and the median annual value required to be ‘comfortable’ was $55,000.”
So what was your answer?
Enter the retirement income gap
This gap can be described as the annual before tax difference between what you would receive on NZ Super and what you think you would need to live on when retired.
Taking the IRD’s survey examples, and supposing you would be claiming NZ Super jointly as a couple after age 65, we get (before tax and rounded to nearest dollar):
“Getting by”
Annually: $39,000 minus $29,185 = $9,815 per year retirement income gapMonthly: $3,250 minus $2,432 = $818 monthly gapWeekly: $750 minus $561 = $189 weekly gap
“Comfortable”
Annually: $55,000 minus $29,185 = $25,815 per year retirement income gapMonthly: $4,583 minus $2,432 = $2,151 monthly gapWeekly: $1,058 minus $561 = $497 weekly gap
Median of all estimates of income that households expected to have in retirement
Annually: $45,000 minus $29,185 = $15,815 per year retirement income gapMonthly: $3,750 minus $2,432 = $1,318 monthly gapWeekly: $865 minus $561 = $304 weekly gap
Of course, these gaps would get even bigger if you were on a lower NZ Super rate, such as single person living alone, but it is interesting to observe that even if you were a retired couple who only wanted to “get by” on $39,000 per year, you would still come up nearly $10,000 short annually if your only combined income was NZ Super. Lacking $189 for a week’s expenses might not seem much of a shortfall if it happened occasionally, but if it went on week after week, month after month, and year after year, the loss in quality of your standard of living would inevitably become only too obvious, and we’re talking in this instance about to just “get by”.
Exercise: Using your answers to what you personally think you’ll need to “get by” or be “comfortable” on (before tax) in retirement, calculate what your retirement income gap would be based on an applicable gross NZ Super rate as listed on the Work and Income website.
Filling the gap
KiwiSaver is designed principally to assist New Zealanders with filling in the retirement income gap.
Poverty in old age is a dreadful thing to endure, and so it makes sense for New Zealanders to take advantage of the benefits of saving for retirement through an incentivised scheme like KiwiSaver.
If you want to check on how much you might need to save up to fill your personal retirement income gap, you can calculate an estimate on Sorted’s Quick retirement calculator by clicking here. Take a note of the amount you will need from this calculator, then go to Sorted's Quick Kiwisaver calculator to work out how much your TOWER KiwiSaver Scheme may provide as a lump sum. The difference between the total from the Quick retirement and Quick KiwiSaver calculators is the additional amount you will need to fund your retirement income gap. It is a simple, two step process, but to assist you we give some worked examples here which we recommend you read first.
If you would like professional advice on filling your retirement income gap, you can find contact details for your nearest TOWER Financial Advisory Services adviser here.
For a copy of the TOWER KiwiSaver Scheme investment statement, please click here.
Source for this article: KiwiSaver Evaluation: Annual Report July 2009 – June 2010, by IRD, publ. September 2010
Inland Revenue Annual Report June 2009 - June 2010.pdf