How to Build Wealth for Retirement

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Everyone knows they need to save for retirement, but in fact, saving is only part of the story. We need to think more broadly than that, because our goal should not be saving but building wealth. These are two different things entirely. Saving is only one part of building wealth. Here is what you need to do to build wealth for retirement.

  • Set a goal to own a debt free property by the time you retire. Having to pay rent or a mortgage in retirement means you will need significantly more savings to fund your retirement.
  • Pay off the mortgage on your family home as quickly as possible. The sooner your mortgage is repaid the more you will be able to save for retirement.
  • Save on a regular basis. It is important to work out how much you need to save and put that money aside through regular contributions to an investment account.
  • Join a subsidised superannuation scheme such as KiwiSaver. Government and employer subsidies will add extra money to your retirement fund. Saving regularly over the long term will compound your investment returns.
  • Make sure you have chosen the most appropriate KiwiSaver investment option for your investment time frame to maximise your investment returns without taking on too much risk. Investing too conservatively over the long term results in low investment returns.
  • Regularly review your life insurance, income protection and health insurance. In the event of illness or death, your wealth will be eroded if you are underinsured.
  • Consider investing in property or setting up a business. These are great ways to increase your wealth over the long term, although not everybody has the capacity for such investments.
  • Protect your personal financial assets in your relationship and make good financial decisions if your relationship ends. Separation and divorce can create a major financial setback which is hard to recover from, especially later in life.

If you are a few years away from retirement and have suddenly realized you are not prepared, urgent action is required.

Start by working out how much you will need.

Prepare a retirement budget for expenses by looking at your current budget and taking out expenses that will no longer apply (for example transport to work) or luxuries that will not be affordable with your new level of income. Add in some new items to cover expenses for the activities you would like to do in retirement, such as joining clubs, playing sports or travelling.

Compare your total expenses with what you expect your retirement income to be.

Current rates of NZ Superannuation are available from the Work and Income website. Any shortfall of income will need to be covered by investments. Use an online retirement calculator to see how much money you will need as a lump sum to cover future retirement income. You may need to add to this amount to allow for big items such as replacing your car or redecorating your house. As a rule of thumb, you will need a lump sum of around $180,000 to provide an additional income of $10,000 after tax per year over a twenty-year period.

Look at options for increasing your savings.

For the last few years before you stop work, try and live on what your future retirement income will be. That way, you will not only save more but you will start to adjust your standard of living to the new level. If you are planning to downsize your house, do it well before you retire, so as to free up funds that can be invested for a good return.

The key ingredient for building wealth is time. The earlier you establish your financial situation and the changes you need to make, the less your financial risk will be.

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