Tue, 01 Feb 2011
A two-step process for a quick “guesstimate"
Step 1: Estimating how much you will need to live off in retirement at the Sorted Quick Retirement Calculator
Note some assumptions made by this calculator:
Of course, your circumstances could end up differently from these assumptions, so please remember the calculator results are “guesstimates” only and seek professional financial advice for personally tailored estimates.
All estimates for the case studies below were calculated on the Sorted website as of December 2010.
Case study 1: A single man
John Smith is single, 40 years old, was born in January 1970, earns $60,000 (before tax) per year, and will draw the single person’s NZ Super rate after age 65.
The calculator shows that John will need to receive an annual after tax income of $34,286 (in today’s dollars) to earn the equivalent of 70% of his before-tax current income of $60,000. Less the NZ Super single person benefit rate ($17,355 after tax) there is a difference left of $16,931 after tax to fill, which is John’s retirement income gap. Assuming John will require this income for 17 years after retiring at age 65, he will need to save $293,047 (including 2% annual inflation)by age 65 (the equivalent of $224,256 in today’s dollars).
Link: Sorted Quick Retirement Calculator
Case study 2: A single woman
Jane Smith is single, 40 years old, was born in January 1970, earns $60,000 (before tax) per year, and will draw the single person’s NZ Super rate after age 65.
The calculator shows that Jane will need to receive an annual after tax income of $34,286 (in today’s dollars) to earn the equivalent of 70% of her before tax current income of $60,000. Less the NZ Super single rate ($17,355 after tax) there is a difference left of $16,931 after tax per year, which is Jane’s retirement income gap. Assuming Jane will require this income for 20 years after retiring at age 65, she will need to save up $330,704 (including 2% annual inflation) by age 65 (the equivalent of $253,104 in today’s dollars).
Note that by assuming three additional years more retirement income is needed for Jane than for John, Jane’s savings target is increased by $37,657 (including 2% annual inflation) or $28,848 in today’s dollars. This assumption made in the calculator is based on statistics showing that women require retirement income for longer than men.
Case study 3: A couple
John and Jane Smith are married, both 40 years old, were born in January 1970, jointly earn $60,000 (before tax) per year, and will draw the couple’s NZ Super rate after age 65.
Remembering the need to calculate for John and Jane separately per person on the Sorted Quick Retirement Calculator, we enter half their joint income ($60,000 divided by 2 = $30,000) for each calculation and the calculator’s default value of 50% of the NZ Super couples benefit rate:
For John, the calculator shows he will need to receive an annual after tax income of $18,011 (in today’s dollars) to earn the equivalent of 70% of his share of before tax current income of $30,000. Less his half of the NZ Super couples rate ($13,288 after tax) there is a difference left of $4,723 after tax per year to fill, which is John’s retirement income gap. Assuming John will need this income for 17 years after retiring at age 65, he will need to save up $78,936 (including 2% annual inflation) by age 65 (the equivalent of $60,260 in today’s dollars).
For Jane, the calculator shows she will need to receive an annual after tax income of $18,011 (in today’s dollars) to earn the equivalent of 70% of her share of before tax current income of $30,000. Less her half of the NZ Super couples rate ($13,288 after tax) there is a difference left of $4,723 after tax per year to fill, which is Jane’s retirement income gap. Assuming Jane will need this income for 20 years after retiring at age 65, she will need to save up $88,575 (including 2% annual inflation) by age 65 (the equivalent of $67,619 in today’s dollars).
As a couple, John and Jane have a retirement income gap of $9,446 ($4,723 x 2) after tax per year and will need to save a combined $167,511 ($78,936 + $88,575) (including 2% annual inflation) by age 65 (the equivalent of $127,879 in today’s dollars).
Step 2: Estimating how much your KiwiSaver nest egg could be worth by age 65 at the Sorted Quick KiwiSaver Calculator
This calculation on the Sorted Quick KiwiSaver Calculator is a lot simpler than for the Quick Retirement Calculator.
For the Quick KiwiSaver calculation, using our simplified case study examples we can enter the annual income before tax ($60,000) for John or Jane either as single persons saving for themselves or as the breadwinning partner within the couple.
Some assumptions are used in the calculation:
Looking back to the Quick Retirement calculation case studies, we can see that:
General conclusions
In general, it is cheaper per person to live as a couple in retirement than to live singly. Because of longer average life expectancies, women need to have more saved than men to achieve the equivalent amount of desired annual retirement income.
The calculations made using the Sorted calculators and the case studies are for demonstration purposes only, and should not be used to base actual retirement savings decisions on. It is recommended that professional financial advice should be sought to match your savings rates and targets with your personal needs and objectives.
TOWER’s financial advisers can be located at this link.
For a copy of the TOWER KiwiSaver Scheme investment statement click here.