The key to a solid retirement is a solid base. Retirement income is often described as a 3 legged stool. Each time a leg is removed, then our foundation becomes more shakey. I would not trust a one legged stool to keep me from falling.
The 3 legs of the retirement stool
The 3 legs of the retirement survival stool are Superannuation, Kiwisaver, and our own investments.
1/. Superannuation
Not enough to live on for most of us. A single person currently receives after tax income of just over $20,000 per year (assuming tax code ‘M’). Even if you have a paid off house, $20,000 is still not enough for a comfortable retirement. If you own a house, you will still have housing costs such as rates, insurance and maintenance. Those 3 alone can cost $4,000 plus. If you are younger than 45 it is also doubtful whether the NZ super payments will keep up with inflation. That would mean you are getting less than $20,000 worth of today’s value. Even worse, superannuation may not exist at all, could be means tested, or delayed until a later age.
2/. Kiwisaver
The second leg of the retirement survival stool for most of us. Someone earning an average salary of $50,000 (‘M’ tax code) who contributes 3% of their income to Kiwisaver from the age of 25 to the age of 65 will have a Kiwisaver balance of approximately $275,000. I have assumed 5% annual investment returns, an annual increase in pay of 2% and an inflation rate of 3%. Based on the 4% rule of thumb this could give us an annual retirement income of approximately $11,000. Combined with superannuation we would now have about $31,000 per annum to live on. This may be enough for some people, but will fall well short for many others.
This number also relies on some pretty big assumptions. That we get pay rises of 2% every year for 40 years. That NZ Superannuation increases with inflation every year. That NZ Superannuation will still be the same amount when we retire as it is now. That we work for 40 years – some of us may not be able to work to 65 due to health or layoffs. That we are contributing for 40 years – some of us start Kiwisaver much later in life. Even withdrawing from Kiwisaver to put towards our first home can have a huge impact on this leg of the stool. The retirement stool is still a bit wobbly I feel, relying on too many things to go our way. With my retirement I don’t like to leave things to chance. I will also need the third leg to stabilise things.
3/. Own investments
The third leg of the stool will be my strongest leg. With these investments we don’t rely on the government or our employer to provide for our future. It is more within our control. For me these will be a combination of stock dividends, bond coupons and real estate income built up from years of investing. If we can’t work until retirement age, this extra income is a necessity, since the first two legs are not available until retirement age. This leg is what is enabling me to retire early. Since the first leg of the stool is not guaranteed for many of us, I am making this leg as strong as I can. So that if Superannuation is not available for me, I will still be ok with two strong legs. If it is available, then that will just be icing on the cake.
Some people do not use Kiwisaver for various reasons. If that is the case, then the third leg will need to become the second leg. It will need to be even stronger to cover the absence of one leg.
Final Thoughts
The more we leave things to chance with our retirement, the more likely bad things will happen. This is Murphy’s Law. In my experience, Murphy has impeccable timing. The superannuation leg is not guaranteed and with so many boomers retiring, this leg will only get wobblier and wobblier. Inflation is a powerful beast that can turn $530,000 of today’s dollars to just $218,000 in 30 years. This is based on 3% inflation. We could experience 10% inflation in the future. We could live to 100. No one knows. We need as much of a foundation as possible to be able to fight off inflation and other uncertainties and live a comfortable retirement. Otherwise, our stool will get too wobbly under the pressure and we will fall flat on our face. Sorry for the image, but it is a stark reality. Our stool will be more like a pogo stick or unicycle. We need to control our own destiny, plan for the worst and not rely on other people to take care of us. Because if they can’t, we will be in for a miserable retirement in poverty.
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The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here
What types of income do you plan to draw on in retirement? How are your legs developing?