Choices or no frills – which will be your retirement?

How many times have we heard it said; we’ll need $1 million in the bank for a comfortable retirement.

It’s a scary number for most and no wonder; in 2022 the Retirement Income Interest Group of the New Zealand Society of Actuaries modelled the distribution of KiwiSaver balances to see how much today’s 45 to 59 year olds might have saved for their retirement.

It worked out at an average of $164,900, or a median of $124,400. That’s a lot less than $1 million.

But is $1 million really how much you need?

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It depends, according to the 2022 New Zealand Retirement Expenditure Guidelines, which are issued annually by Massey University.

For instance, working part-time or delaying retirement ,are both viable ways of reducing how much you need to save. Retiring to a provincial centre, rather than a metropolitan centre, also makes a big difference.,

Even choosing to invest in a higher risk growth fund, over a balanced fund, can close the gap.

Liam Robertson, an advisor at Milford Asset Management, cautions that switching to a more aggressive fund is not for everyone and it depends on how comfortable people are with risk – as demonstrated during Covid, when a lot of people shifted their savings into conservative funds after watching their balances drop.

But over the long term, the difference between a conservative fund and a growth fund could be significant.

As an example, a 35-year-old earning $55,000 per annum and contributing 3% alongside their employer could retire with a lump sum of $260,000 in a conservative fund, assuming an average return of 3%.

The same savings invested in a growth fund over the same period of time, perhaps averaging 7% per annum, would make them $556,000.

Assume it’s a couple saving and earning at the same rate and they will hit the magic $1 million – or will they?

That assumes that nothing gets in the way, like stopping contributions to have a family, for illness, redundancy or other obstacles.

So would a lot less than $1 million be enough?

According to the Massey report, a one-person household would need a lump sum of $277,000 for a no frills retirement in a metropolitan centre; they could achieve that by saving $343 a week from the age of 50 (or $109 from age 25) in a balanced fund – or $314 per week in a growth fund ($81 for the 25-year-old) to save the same amount.

A no frills weekl budget – a basic standard of living – is assessed as having income totalling $781 for a one-person household in a metropolitan city, or $931 for a two-person household.

A choices budget – a more comfortable standard of living with some money for luxuries or treats – requires a weekly income of $1217 for a one-person household, or $1578 for a two-person household.

The good news is that even a choices lifestyle doesn’t require $1 million in the bank.

Thanks to NZ super already providing you with some income, $755,000 will suffice for a two-person household in a metropolitan city (or $480,000 in a provincial centre).

But you’ll have some catching up to do if you’ve hit 50 and haven’t started saving already – a two-person household in a metropolitan city will need to be putting aside $954 or $457 a week each to hit the magic number.