When Otto von Bismarck launched the first state pension in Europe in the 1880s, only one percent of the German population lived to collect it. Qualification for payment was carefully set at 70, the founder of the world’s pioneering welfare state had done his sums and knew this wouldn’t cost much: because 99 percent of people didn’t live that long!
Fast forward to modern-day NZ, and the number of people reaching the age of 100 has quadrupled over the past 30 years. It is likely to quadruple again by 2035. Including retirement benefits, there are more Kiwi’s than ever receiving some form of social welfare. As a result, it will be considerably harder to resolve the complex financial challenges that rising longevity presents, not least of all the affordability to the taxpayer of sustaining NZ Superannuation (commonly referred to as “the pension”), which is one of the most generous in the world. The obvious inability for future NZ taxpayers (via the government) to continue to provide NZ Superannuation at current levels means it is inevitable the retirement age will need to rise, and probably also a reduction will occur in the amount paid to super-annuitants – even if that is calculated as a percentage of the average wage.
While it’s impossible to know precisely how long we’ll live, it’s undeniable that:
It’s not just how long we’ll live; it’s also how we’ll live. In other words, we are also statistically likely to be more active than before. Increased activity due to good health often leads to higher expenditure in retirement. The implications for saving and investing are huge.
The concept of retirement is changing fast, and our long-term financial plans must adapt accordingly.
Working for longer can reduce the “longevity risk” of our investments. Younger workers should consider saving a higher proportion of their incomes. But, good financial planning also involves flexibility and of course, the risk of running out of money in retirement must be weighed against dying with too much after years of unnecessary sacrifice. Nobody wants to be the richest person in the graveyard, after having spent too much of life toiling away saving and investing!
Work is also changing. The idea of working your entire career at one company and then retiring at age 65 is not a reality for most, and it’s not sustainable for most employees. Instead, consider downshifting into part-time or less demanding work, postponing the years when you’ll have to live entirely off your savings. That might mean getting a late-in-life teaching gig, consulting for a company in your industry or working for a local non-profit.
It’s a truism of accounting: if you can’t increase your income, you need to cut your expenses. One way to do that is to move somewhere with a lower cost of living, including council rates. That said, some research suggests cities are better for retirees than regional centres, probably due to the increased amnesties and medical facilities available.
Can you rely on family?
Having greater reliance on our children and even grandchildren to help support us financially in retirement is one possibility. This may involve pooling assets such as joint ownership of a multi-generational family home.
The team here has a range of modelling tools designed to create several life scenarios to help identify what is the most appropriate strategy for you in retirement. The tools consider your total asset value including investments, property, debt, and businesses.
Feel free to get in touch so we can work to build the scenario that you believe most closely mirrors your assets, overall aims, and life expectancy.