Planning for Retirement in NZ

When we finish work and retire we all want the same thing. A lifestyle we can enjoy, enough money to be comfortable, maybe a little extra to help our kids out.

Retirement planning is the key to getting there. With the help of this guide, spend a little time setting goals, reviewing your investments, and coming up with a strategy for achieving your desired lifestyle.

The earlier you start, the better - and it’s never too early. Whether you’re 20 or 60, it’s worth doing a little homework and checking your KiwiSaver and investments to make sure you’re on the right track. Starting earlier means that compound interest has more time to do its thing. Every dollar can earn a return and those returns can earn their own, helping to grow your investments over time.

To make a good plan you need to know what you want to achieve. For retirement, that means figuring out the type of lifestyle you want - and how much money you’ll need to make that happen.

Read more about setting and achieving financial goals

Two factors that affect the total cost of your retirement:

1. How long your retirement is

These days the average New Zealander lives to their early-mid 80s, but it’s safer to assume you’ll reach 90 or older. That means if you retire at 65 you’ve got 25 years of retirement to fund.

2. How much you spend in retirement

This can feel like the tricky part. There are a few ways to calculate this, including the income replacement method - which requires replacing 80% of your pre-retirement income, or you could follow guidance from Massey University on the ‘average’ expenditure in retirement (assuming you’ll be retired for 25 years, you’ll need $352,495 for a ‘choices’ lifestyle in a city, plus super).

It’s worth factoring in NZ Super - this is just over $1.1m for 25 years total in a two-person household, and around $700,000 in a single (these figures are indicative only and based on current payment rates, which may change in the future). As a general rule, you’ll probably spend a bit more in the early years of your retirement, then as you slow down it’ll decrease, before increasing again when you may require extra care.

The total you need in retirement will depend entirely on the type of lifestyle you want to lead, your current financial situation, and whether you own your own home.

How much do I need to retire in NZ? Read our guide

The secret to a comfortable retirement isn’t finding ‘the best investment’, it’s about finding the best investment for you. Your choice should match your investment horizon, your time commitment, your knowledge, and your appetite for risk.

Setting up your investments initially is the most time consuming step. From there, it’s just a matter of reviewing them annually, or whenever your circumstances change significantly (e.g. having a child or buying a home).

1. Match volatility to time

Generally speaking, if you’ve got longer to invest you can go for more volatile investments, which have historically delivered higher returns in the long run, but also come with a higher risk of loss and short-term fluctuations. A longer timeframe enables you to wait out short-term dips and benefit from the general upward trend of the market.

If you want to use your money in the near future, you may want to choose an option that has less volatility. While it might not deliver the same returns, your investment will be exposed to less risk and fluctuations.

Read more about your investment horizon.

2. Pick investments that suit your knowledge and time commitment

If you’ve got the time and interest, you might pick individual shares, or other speculative investments. If you’re looking to balance risk and reward with a more hand’s off approach, many people follow the core-satellite method, where 80% of their portfolio is made up of diversified investments that track market returns, like index funds, ETFs, or managed funds.

Read more about investment strategies for beginners.

3. Fees matter

Some studies have found that, over the long run, lower fee, passively managed investments that track the market (like index funds) tend to outperform higher fee actively managed investments.

Read more about investment fees.

KiwiSaver

KiwiSaver is the main way that many New Zealanders save for retirement, and rightly so. In most cases you can’t access it until you’re 65 or buy your first home, so it’s locked away - plus your employer is legally required to contribute.

Read how to make the most out of KiwiSaver

A quick KiwiSaver review is worth doing each year. Check what fund you’re in, whether it suits your goals, and what your contribution rate is - you may need to bump the rate up to hit your target. If something isn’t right, switching providers is easy and often only takes a few minutes online.

How to switch KiwiSaver provider

Investments outside KiwiSaver

KiwiSaver isn’t your only option when saving for retirement, there are plenty of others to consider including:

• Index Funds
• ETFs
• Shares
• Bonds
• Actively Managed Funds

A diversified portfolio could include several of these asset options, the important part is making a choice that suits your goals, risk appetite, and investment horizon. Read more about the various pros and cons in this article.

Selling your home and moving to something smaller frees up cash and can reduce the ongoing costs of running your home.

The trick is ensuring that downsizing delivers the benefits that you expect it to, which means:

• Moving to a cheaper property, not just a smaller one. A cheaper region (i.e. Auckland to Hamilton) is even better.
• Buying a more energy efficient home with lower ongoing costs.
• Downsizing early, as soon as it's practical and convenient to do so.
• Understanding the true cost of retirement homes. Sorted has a great guide.

Your investments should be adjusted annually to suit where you are in life. When you’re young and far from withdrawing, more volatile investments with higher returns might work well. As you approach certain milestones (like buying a home, or retiring) you may consider more conservative investments, since you don’t have as much time to ride out volatility.

General rules of thumb:

• 7+ years until withdrawal = high growth, more volatile
• 3-7 years until withdrawal = balanced, less volatile
• 0-3 years until withdrawal = conservative, cash funds, or savings

Financially speaking, your life up to retirement will be all about accumulation and gaining more investments, more wealth, and more equity.

Once you retire, it’s time to decumulate, or in other words; spend!

If you’ve done steps one to three well, you’ll hopefully have enough money to last, but it still needs to be managed carefully. The bucket strategy is a great way to do that.

Instead of withdrawing all your cash and having it slosh around in your bank account, many people split their retirement savings into three different buckets:

Bucket one - short term (0-3 years)

Bucket one is for the next three years of spending. You might keep a year's worth in a high interest savings account, such as Kernel Save, then the next two years in something like term deposits, bonds, maybe cash funds. The idea is that it’s earning a little interest but the investment has low volatility and is accessible when you need it.

Bucket two - medium term (3-7 years)

This one is ideally earning a little bit in the background, ready to refill bucket one as you spend it. Bucket two should have decent income earning potential and therefore a little bit of volatility, but not too much. You could consider balanced or conservative funds.

Bucket three - long term (7+ years)

Bucket number three is your wealth engine. Generally investing in more volatile growth assets like equities, index funds, and ETFs. The goal is to keep this aside for at least 7 years.

Most people set a schedule - quarterly or annually - to review and rebalance their buckets. Once that’s done this setup works a bit like the good old Wellington bucket fountain - you’d look at bucket one and see how much you’ve spent, then top it up from bucket two, then top bucket two up from bucket three.

Retirement planning doesn’t need to be complicated. It's really about consistency - a few good decisions made early, reviewed annually, and then left to compound.

Kernel Wealth Limited is the manager and issuer of the Kernel KiwiSaver Plan and Kernel Funds Scheme. A Product Disclosure Statement is available at Kernel Wealth | Resources & Documents. Investing involves risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time. The information provided should not be relied upon as investment advice or recommendations and should not be considered specific legal, investment or tax advice.