Thinking about retirement

Retirement might look like it’s a long way away. Realistically, it probably is a long way away—if you’re in your 40s, you still have 20-ish years to go, and if you’re younger than that, it’s an even longer road.

But even if your retirement is a long way away, it’s still worth thinking about it today. Here’s why, and what you can do about it.

Not-so-super superannuation

Everyone in New Zealand can get superannuation when they turn 65 (for now). Not a bad deal, really—$400 or so a week, no questions asked. But could you live on $400 a week? For lots of people, that would barely cover the rent.

Superannuation is barely higher than rent because it assumes you don’t need to pay rent at all. Rather, superannuation assumes that you own your own home, without a mortgage, when you turn 65. That’s why nana can live in her paid-off house for free, and pay the day-to-day bills out of her superannuation payments.

For a long time, this has worked pretty well. Older Kiwis tend to own their homes and tend to have purchased them at a young age. But this is changing. People are buying their homes later in life, spending more on them, and in some cases not buying houses at all. If you think this may be you, then superannuation alone may not be enough to live on.

KiwiSaver is a start

But you might be socking away a bit of your salary into KiwiSaver. Over time, this should grow into a decent little nest egg to help pad out your superannuation and pay the bills. You can figure out how big that nest egg will be, and how much income it could give you, using this tool by Sorted.

But let’s work through this. Let’s say you’re 30, and you make $50,000 a year. You’ve just joined KiwiSaver, and you’re contributing 3% of your salary. Your employer kicks in another 3%, so you’re saving $3,000 a year.

If we plug those numbers into the Sorted calculator, it shows that by the time you’re 65, you’ll have just under $200,000. Not bad! But remember, that money’s going to have to last you a long time. If you’re 30 now, you can expect to live into your early 90s. So if you retire when you turn 65, you’ll only be able to spend $200 a week from your KiwiSaver. Add that to the $400 you (might) get from superannuation, and now you have $600 a week to live off...for thirty years.

Where to from here?

If you’re comfortable with the numbers we mentioned above, then that’s great! After all, it’s up to you what kind of life you want to live, and your retirement is no exception. But if you’d like to have a bit more to live on in your old age, then read on—you can take little steps today that have a big impact on your future.

The trick is to start investing now, and don’t stop until you retire. The amount you invest doesn’t really matter—rather, it’s all about keeping your money in the market for as long as possible, and constantly adding to it. Here’s why:

Start small and compound

Compound interest is when you invest for a really long time, and eventually start earning interest on your interest—or returns on your returns, as the case may be.

For example, let’s say you bought some shares for $100. After a year, they grow in value by 10%, so now they’re worth $110. In the next year, they grow in value by a further 10%. This 10% is 10% of $110, which means they’re now worth $121.

Over time, this really adds up—especially if you’re buying shares on a regular basis. It’s like a snowball slowly turning into an avalanche.

Compound interest is a great way to make your retirement more comfortable—by investing small amounts, on a regular basis, for a long time, you can see those small amounts grow into really solid returns by the time you want to retire.

If you’re 30 now, you have at least 30 years to put some money aside—but the earlier you start doing so, the better. It doesn’t have to be a large amount each week, either! Compound interest will help it grow into the amount you need to live on in your dotage.

Ride the growth train

We’ve talked about risk and time horizons before. In a nutshell, if you have a long time horizon, you can take more risk. That’s great news if you’re investing for retirement because your time horizon is really long. If you’re 30, and you want to retire when you’re 65, you have 35 years to ride out the ups and downs of the share market. That’s your entire life so far, plus five more years for good measure! If you want to work until you’re 70 (not out of the question), then you have 40 years to watch your savings grow. That’s ages (technical term).

This means you could invest in things that are a bit more risky and volatile in the short term, in order to chase more growth in the long term. This makes your small, regular contributions that much more powerful.

Build up over time

Right now, you might only be able to afford $5 or $10 a week. But that probably won’t be the case forever. No matter what your job is, you’ll probably get pay rises as you change roles, build up more skills and get more experience. So don’t be too gutted if you can only put aside a wee bit for the moment—it’s building a habit and setting a foundation to grow over time. As your income grows, you’ll be able to build on that foundation.

Wrap it up

While your retirement might be a long way down the track, you can see how the decisions you make today can have a huge impact on how comfortable (or not) that retirement ends up being.

The sooner you start putting money aside, the more options you’ll have in the future—so we reckon you should go ahead and set a small goal, stick to it, and reap the rewards when your old age rolls around. Your future self will thank you!

One last thing: if you’re not sure how much money you’re going to need or want in your retirement, you can use this tool from Sorted to figure it out.

Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed a return, and you might lose the money you started with. Before investing, you should read your fund’s product disclosure statement. It contains the investment objectives, risks, fees and other information. You should carefully consider this information in relation to your investment time frames and goals.