Retirement. For some of us it may be very close, for others, it might still be 10 years away. But the question we all need to answer is how much money do I need to have saved for my retirement?
The first step is of course, deciding what our retirement goals are? Massey University does an annual survey of Kiwis to find what the average retired Kiwi spends - the estimates range from $600 to $1400 a week. Our retirement goals are unique as are our personal circumstances ( mortgage free, living alone, etc). It’s important to give some thought on what figure is appropriate for our needs. Again, this doesn’t have to be an exact figure - life doesn’t deal in absolutes anyways - just make sure it's in the ballpark.
Once we know what we need as regular income in retirement, the next step is to figure out the KiwiSaver lump sum required at retirement to achieve that level of income. It's not as simple as multiplying your annual income requirements by the number of years you expect to live, because that does not take inflation into account. In the about 30 years you expect to live after retiring, prices and expenses can go up manyfold.
Most Kiwis also won’t be able to save enough to be able to keep that lump sum in the bank and draw down on that - definitely not at the savings interest rate we’re seeing currently. So the money will have to be invested somewhere - how it will be invested will be a factor in how much you need at the start of your retirement.
So how do we calculate it?
Step 1: Based on what you need at retirement, we first calculate what your retirement shortfall in every year of retirement will be. For that we use an inflation assumption (2% at the time of writing this - May 2020) to increase the amount you need every year. We then deduct the expected NZ Super payment you will receive per year (adjusted for inflation).
This gives us the additional income you need each year.
Step 2: Using the data from step 1 , we then calculate what the total lump sum you need at the start of retirement will be. We want to find what the minimum amount is that you need to have to ensure you do not run out of money at retirement. That is the (y) in the goal seek calculations below.
|-- Logic --|
|Test Start = AmountReq/2|
|Upper Bound = Amount Req|
|Lower Bound = TestStart|
|Goal Seek Logic|
|Run Calculations till y>0 & y<100|
|If y>0 then UpperBound = TestStart|
|else if y<0 then LowerBound = TestStart|
|TestStart = (Upper+Lower)/2|
Step 3: Some of us will have assets other than KiwiSaver, such as property or term deposits, which we intend using for retirement. Many of us will also have liabilities such as a mortgage right now. We need to know what part these assets and liabilities will play in your retirement. For that we use inflation and growth expectations to estimate what your assets will look like when you retire. We also use repayment and interest rates to see if you would have paid off all your liabilities or if there is still something to pay off at retirement. This gives us your net worth at Retirement.
Step 4: Finally the difference between the lump sum you need at retirement (Step 2) and your net worth (Step 3) is what you will need in your KiwiSaver at retirement.
Can I do these calculations by myself?
Yes, you can. Because of the number of variables and calculations required, it may take you a while. But if you’re game, send us an email and we’ll send you the formulas used in all the above calculations.
At National Capital, however, we use custom software to perform these calculations - so we can do it quickly (less than 1 second) and very very accurately. No fat fingers punching wrong numbers into a calculator with us!
But this is only part of the journey. Once we know what lump sum we need in our KiwiSaver accounts, the next step is to find out how to get there.
Read about that in our next post - How much return do I need from my KiwiSaver account?