How to plan for retirement in New Zealand

You want to create a plan for your retirement. But with the sheer volume of information on the world wide web about retirement planning, it’s hard to know where to start.

Well, this guide aims to teach you step-by-step, how to create a plan for retiring in New Zealand. Keeping in mind all our unique Kiwi considerations, like NZ Super and KiwiSaver. And because everyone is different, and there’s no one-size-fits-all approach to planning, we’ll walk you through how to create a plan that’s tailored to you.

What is a retirement plan?

First off, what actually is a retirement plan? Simply put, a retirement plan is a clear picture of how your money will support your life in retirement – not just how much you have, but how it will be used over time.

A plan brings together a range of factors like your goals for retirement (*cough cough* becoming pickle ball champion) and your savings and investments, to create a roadmap for bringing your retirement to life.

And because retirement planning isn’t just about saving, it also bridges accumulation (saving for retirement during your working years) and decumulation (strategically drawing down on your savings to fund your retirement), ensuring you’re covered on both bases.

When do people start planning?

If you were a particularly diligent young person, you may have started planning the day you got your first job and began squirreling money away. But the more likely scenario is that you started planning later on in your career, actively putting aside money for retirement. Our research found that most Kiwis start to really think about their retirement (beyond KiwiSaver) around the age of 51-65.

It’s never too early to start thinking about retirement, but a more structured and formalised plan usually becomes useful around 15 years before retirement. By this stage, your income, expenses and assets tend to be more predictable and can provide a more accurate basis for planning.

How to create your plan

We won’t lie, creating your plan isn’t as simple as reading this article and Bob’s your uncle. Planning can involve a bit of head scratching and potential profanities while trying to login to your various banking and investment accounts.

So if you want to jump straight into planning, it might be worth grabbing those login details and a pen and paper, or pull up an Excel spreadsheet if you’re that way inclined.

Step 1: Picture your retirement

Before diving into the numbers, it’s helpful to know a bit about the life you’re planning for. Essentially, what do you want retirement to look like?

Many people approach retirement planning by focusing first on financial targets. “How much money do I need?” “What level of investment returns can I expect?” “I wonder if I have more in my KiwiSaver account than Carl.” These questions matter (for the most part, sorry Carl), but they only really make sense once the lifestyle behind them is clear.

Do you see yourself retiring at 65 and hopping on a plane to the Italian wine country? Or will you take things slowly, gradually reducing your work hours and enjoying more time with loved ones? Both are great approaches to retirement, but someone who expects to travel more frequently may require a higher level of retirement income than someone with a slower pace of life.

To assist with this step, we’ve compiled some questions you can ask yourself when picturing your retirement:

• When do I want to retire?
• Where will I live?
• Who will I live with?
• How will I spend my free time?
• Will I have any large one-off costs?
• Do I have personal goals I want to fund?
• Do I want to leave a legacy for loved ones?

Step 2: Estimate your retirement spending

Now you know the lifestyle you’re planning for, it’s time to think about how much it might cost.

This is where your bank statements come in handy, as your current spending can provide a benchmark for estimating your retirement spending. It can also pay to think back to Step 1, as this can help you understand the costs that may arise as a result of your ambitions for retirement.

To help you estimate your retirement spending, it can be helpful to break down your expenses into three categories:

1. Essential spending

Such as housing costs, food, utilities, or insurance.

2. Discretionary spending

Such as travel, dining out, or hobbies.

3. Irregular expenses

Such as replacing a vehicle, renovating a home, assisting family members financially, or unexpected events.

Some of your current expenses like mortgage repayments or commuting costs might fall away in retirement. There’s also potential to gain a few expenses, like increased travel costs or memberships to social clubs.

Doing this activity should help you to understand your annual lifestyle costs, or how much you’ll spend on a yearly basis in retirement. That being said, keep in mind that your spending patterns may change over time. The early years of retirement can include more activity, while the later years may be a bit quieter with lower discretionary spending. Understanding these patterns doesn’t require precise forecasting, but having a general idea of how retirement unfolds can make planning easier.

Kind of like the weather forecast, your forecast for retirement spending isn’t going to be 100% accurate. But with a general idea of the conditions, you’ll likely feel much more prepared.

Step 3: Take stock of what you have

To fund your retirement spending, you're going to need retirement income. But where will this come from?

There’s an array of retirement income sources that Kiwis rely on, but here are some of the most common options:

• NZ Super
• KiwiSaver
• Other savings and investments (e.g. managed funds)
• Property (e.g. rental income)
• Supplementary income (e.g. part-time work)

You probably have many of these financial assets in your arsenal already. Now is the time to take stock of what you have and make some projections for the future. How much will you have in investments by the time you retire?

To help you do this, why not use our retirement calculator? Our KiwiSaver calculator estimates how your current balance could grow and compares your projected retirement income with the lifestyle you want. You can adjust assumptions such as retirement age, expected lifespan, contribution rate, fund choice, and whether NZ Super is included. And you can add in other savings and assets that you may have.

Step 4: Calculate how much you need to save

Now it’s time for the age-old question… How much money do I need to save?

By completing Step 2, you’ll hopefully have a rough idea of how much you’ll spend on a yearly basis in retirement. To calculate how much you need to save, take your estimated annual lifestyle costs as a lump sum and multiply it by the number of years you expect retirement to last. A common rule of thumb people use is 25 years, assuming you retire at 65 and live until the age of 90.

Annual lifestyle costs
x
How many years you expect to be retired
=
How much money you need to retire

You can then subtract the amount you expect to receive from NZ Super, giving you your retirement number or savings goal. And since you’ve taken stock of your existing financial assets and their projections, you’ll have a good idea of whether or not you are on track to meet this goal.

Step 5: Create a savings plan

We know, a plan within a plan seems excessive. But whether there’s a gap in your savings or it looks like you’re on track, it can’t hurt to have a savings plan in place.

If you have a shortfall, consider using a savings calculator to determine how much you should save each month to meet your goal. Funnily enough, we also have a Savings Calculator at your disposal to help you figure this out.

There’s also plenty to be said in optimising your current savings plan. Below are a few considerations for doing so.

KiwiSaver settings

Check that your KiwiSaver settings, like your fund choice and contribution rate, still suit your goals, timeframe, and risk appetite.

While doing so, consider your investment time horizons, or when you’ll need access to money. Retirement can span decades, so it’s unlikely you’ll need to access all the money in your KiwiSaver account at once. For your short-term needs, money may be better suited in a lower-risk fund, while funds that won’t be needed for many years may be better off in a higher-risk fund and exposed to more growth.

Investment options

Review your existing investments to check they are still right for you. This is also a good time to explore other investment options you may not have considered yet that could help your money work harder.

Housing and living arrangements

While your family home may not produce income directly, owning your home can reduce your living costs in retirement and provide a level of stability that renters may not experience. In some cases, homeowners choose to downsize or release equity to support retirement spending.

Spending adjustments

Look at where small changes could improve your position, without compromising the way you live now.

Step 6: Create a drawdown plan

Finally, it’s time to make another plan (we swear this is the last one). This one thinks about how you’ll use your savings once retirement begins.

A drawdown plan sets out how much you withdraw each year and which assets you draw from. It balances spending with making sure your money lasts throughout retirement, while allowing investments to continue growing and keeping up with inflation.

A simple yet effective drawdown strategy commonly used by retirees is the Three-bucket Strategy. This strategy breaks down retirement savings into three time horizon buckets based on when you will need access to funds, balancing the need for immediate income with the long-term growth of your investments. Our AMP advisers often use this strategy to help members design a plan that fits their specific goals, timeframes, and comfort with risk.

There are plenty of drawdown strategies out there, it can pay to do your research to figure out which option will be the best fit for you.

Step 7: Be flexible and check in regularly

And there you have it, your retirement plan. But remember, a retirement plan is never set and forget!

Like the weather (yes, we’re using another weather analogy), life can change unexpectedly. You wouldn’t leave the house without a brolly knowing there’s a 50% chance of rain, and the same thinking applies to your retirement plan. Your plan should include built-in buffers like a rainy day fund (ba dum tss) and should be checked regularly, providing you with flexibility and certainty in the face of life’s many curveballs.