The Generation Who Can’t Afford to Retire

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The dream of a comfortable retirement lifestyle is gradually getting out of reach for many New Zealanders – not only those nearing the end of their working life with little or no savings, but younger people who have battled against record house prices to buy their first home.

Massey University research on living costs in retirement has consistently painted a sobering picture. It shows that spending in retiree households is more than NZ Superannuation. How much more depends on where you live and how frugal or extravagant your lifestyle is. The most recent research showed that a two-person household living in a provincial area on a no-frills budget is likely to spend around $14 a week more than NZ Superannuation. On the other hand, city dwellers with a more comfortable lifestyle spend around $800 a week more. Clearly, if you are struggling to save for retirement, a move to a provincial area is a good strategy. However, that can mean leaving behind friends and family, both of which are important ingredients for a happy retirement.

One of the key determinants of well-being in retirement is ownership of a debt-free home. NZ Superannuation is simply not enough to cover mortgage payments or rent. Sadly, around 20% of retirees still have a mortgage and this percentage is likely to increase. In addition, around 25% of those over the age of 65 don’t own a home. Home ownership rates are falling, and those who have bought first homes in the last few years at record prices have correspondingly high mortgages. For many, the goal of paying off the mortgage before retirement will simply be unattainable.

Already many of those who receive NZ Superannuation are working to supplement their income. Statistics show that around one third of people over the age of 65 are in some form of employment. It would be interesting know if these people are working by choice, or because they are struggling financially. Given that NZ Superannuation falls short of covering retirement living costs, working seems to provide a much-needed supplementary income.

We are now seeing signs of rising inflation which is eating away the purchasing power of money saved. With 5% inflation and a return of 1.5% before tax on bank term deposits, those who are saving for retirement will need to find ways to inflation-proof their nest egg or they will be going backwards.

NZ Superannuation payments increase on 1 April every year as the amount paid is linked to the average wage. In theory, this increase allows for inflation, but that’s only if wages go up along with inflation – which is now rising. However, it can be argued that the rate of inflation for retirees is different than for the average population and is probably higher. The key drivers for high costs of living for retirees are home ownership, property maintenance, property rates, and insurance – all of which have had big increases in recent years. If increases in NZ Superannuation don’t keep up with these costs then retiree incomes will decline in terms of purchasing power.

People over the age of 50 are worried about retirement. Uncertainty over just how much money is needed for retirement is clearly a cause of some of the concern. While day to day living costs are reasonably predictable, retirement plans can be derailed by unexpected expenses such as replacement of appliances, home maintenance, health costs and supporting children or grandchildren. Then of course there is the uncertainty of lifespan – and people continue to live longer.

All this adds up to a sorry picture of a generation who can’t afford to retire – well, at least, not on the terms they would like. What can be done to fix this problem? There are some policy fixes needed, particularly around the provision of affordable housing and the indexing of NZ Superannuation payments to the rate of inflation which applies to retirement living costs. More research and education is needed to ensure people are well informed of what their retirement living costs might be and how they can best prepare for retirement.

Retirement can be delayed but not forever and anyway, do we really want to see our older parents and grandparents forced to work? It’s time to take action to stop retirement poverty.

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Liz Koh

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