Establish your Financial Plan

Establish your Financial Plan as 3 plans
Your overall financial plan is made up of 3 basic plans.

  1. Your cash budget plan.
  2. Your investment plan.
  3. Your insurance plan.

It is set out according to this diagram.

As you can see, one of the sub-plans of the investment plan is a retirement plan. The only way you can guarantee financial security for the future is to establish a financial plan as soon as possible. Most people know that at some stage they have to make financial provision for their retirement, but some people don’t know how to go about it and who to trust. This part of your retirement planning is very important, so make sure you receive good help from financial advisers.

Calculate how much do you need for Retirement?
There are 3 methods to use when calculating the amount you will need.

  1. Method A – The average Kiwi:
    The present living alone national super payment is $210.00 per week after tax. The Retirement Commissions Office has shown that, according to their research, the average New Zealander believes they will require $370.00 per week in retirement to meet their desired lifestyle.

  2. Method B – 70% of Annual Income:
    Another estimate put forward is based on 70% of the annual income you estimate to be earning before you retire. Many consider this as a good formula to use, although some expenses may increase in retirement (such as medical expenses etc). Other expenses may decrease (mortgage payments), offsetting the increases.

  3. Method C - Current Annual Expenses:
    Another simple method is to work out in today’s dollars what you believe your weekly expenses will be if you retire today, and multiply that figure by 52. This gives you an annual retirement income based on today’s dollar value. Working on today’s figures, you should be able to work out any shortfall between the national super you will receive and the income level you believe you require.

You can also calculate how much savings you need to put aside on a weekly basis from now on, in order to provide the capital that will allow you to reinvest and provide interest income to supplement any other income (such as the national super).

Answers about Retirement Savings
Retirement income is a combination of the government pension and your savings, plus any investments you have. If you are saving for retirement you need to answer some important questions.

These are:

  • What regular income will you need each year of retirement?
    This will depend on the income you think you need, to pursue the lifestyle you have planned.

  • How big do you think the government pension will be?
    Some of the money will come from the NZ Super but how much will that be? At present the annual amount of NZ Super for a single person, living alone is $12,756.00 or $1063.00 per month. For a retired couple, the amount is $19,620.00 or $1635.00 per month. NZ Super is available to anyone over 65 years of age, and it is indexed to the annual inflation rate.

  • How much will you have to save in total?
    To make up the difference between the pension and what you want you will need to save a lump sum big enough to provide a regular income, probably through investment, for as long as your retirement will last. The life expectancy for a man is 80 and for a woman 84. An option that is worth considering is to buy an annuity at retirement.

    You buy this with your lump sum and then receive income from it, as long as you need it. It removes the danger of your lump sum running out before you die. The risk is that if you die early the annuity provider keeps the lump sum.