The Retirement Income Gap

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We all know that NZ Superannuation just isn’t enough to live on. But how big is the gap between what you need to live on and your pension?

Every year, Massey University releases a report which looks at typical expenditure for retirees and compares that with their income. The report is based on data collected by the Department of Statistics as part of its Household Expenditure Survey which is done every three years. The 2023 Retirement Expenditure Guidelines Report from Massey University is based on the 2019 Household Expenditure Survey, with adjustments for inflation since then. You can read the full report here

The report considers two geographical areas – the ‘Metro’ area including Auckland, Wellington and Christchurch, and the ‘Provincial’ area which covers the rest of New Zealand. It also distinguishes between a ‘No Frills’ lifestyle which reflects a basic standard of living and a ‘Choices’ lifestyle which reflects a more comfortable lifestyle. Single person households are considered as well as two person households. For all categories, the data shows the average household spends more than their income from NZ Superannuation.

Even more concerning is the fact that the gap between NZ Superannuation and household expenditure has increased over the last year, despite NZ Superannuation payments being increased by more than the increase in the Consumer Price Index. The main contributors to rising costs were food, recreation and culture, housing, household utilities and insurance. No surprises there.

The smallest income gap was around $88 a week for a two person household on a No Frills budget in a Provincial area, ranging to a gap of over $865 a week for a two person household on a Choices budget in a Metro area.

The estimated lump sum needed to fund these gaps ranges from $92,000 for a two person household on a No Frills budget in a Provincial area to $969,000 for a two person household on a Choices budget in a Metro area.

The obvious conclusion from the Massey report is that unless you find ways to live more cheaply than the average household, you will need savings to supplement your NZ Superannuation. The amount you need will depend on whether you live with another person, whether you live in a Metro or Provincial area and how frugally you live. If you don’t have the required lump sum there are choices you can make to improve your situation:

  1. You can continue to work. The percentage of people over the age of 65 who are working either full time or part time is increasing. Working not only allows you to continue saving, it also cuts down your time in retirement, meaning that you need a lesser lump sum for when you stop working.
  2. You can take a scalpel to your budget and cut it right back to a No Frills budget or less.
  3. You can move from a more expensive urban area to a provincial area where weekly costs are lower. This may also allow you to move to a cheaper house, which means you will be able to add to your retirement nest egg.
  4. You can move to a cheaper house within your current geographic area, which allows you to free up money that is tied up in your house.
  5. You can consider ways of tapping into the equity in your home – for example by taking out a reverse mortgage or selling part of your home to someone else such as a family member.

As you can see there are a number of strategies for improving your financial situation in retirement. However, most of them rely on property ownership and sadly, an increasing number of retirees are renting. For renters, the biggest challenge is finding alternative, cheaper living arrangements such as social housing.

Once you are in a situation of having your living arrangements sorted and a lump sum large enough to support your income gap, the next challenge is to invest your money. You should make regular draw downs from your investments at the right rate – a rate that ideally means you have enough to live on without being in danger of running out of money before the end of life. This is easier said than done!

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