Adequate lump sum savings at retirement age could be 40 per cent lower than commonly assumed after taking into account typical spending slow-downs post age 65, according to a just-released NZ actuarial study.
The analysis by the Retirement Income Interest Group (RIIG) found the average New Zealander spends about 2 per cent less on average every year after age 65.
If spending held level post-retirement in real terms with inflation at 2 per cent, income requirements would likewise rise 2 per cent every year, the RIIG report says.
“But if real spending is assumed to reduce by 2% a year from age 65, the dollar amount of required income stays level, and the savings balance needed at age 65 could be 40% smaller,” the study says.
RIIG, which is housed under the NZ Society of Actuaries, says the findings call into question many savings models that factor in steady spending habits through retirement.
“We recommend that industry and government agencies review the assumptions implicit or stated in their commentary and tools including calculators and savings guidelines and consider how to reflect that real spending typically reduces through retirement,” the report says.
In fact, RIIG says New Zealanders tend to tighten the purse-strings even more than offshore counterparts during retirement in an “unexplained puzzle” that could reflect lower savings balances, extended working lives or a generational effect.
Adjusting the spending parameters has a “significant effect” on target retirement lump sums, the report says.
For example, to maintain an annual income of $56,000 per year (including NZ Super) from 65 through 90, retirees would need to have saved $605,000: the figure shrinks to $375,000 if an average 2 per cent fall in spending occurs over the 25-year period.
“We suggest that New Zealanders will find estimates in the order of $375,000 more motivational and feasible than $605,000 and may be comfortable with the required reduction in real spending,” the study says.
Among other recommendations, the RIIG paper suggests current, or imminent, retirees need to carefully consider spending needs, weigh up potential future medical costs, investigate late-life public services or subsidies, and, consider “options for using housing equity”.
The latest RIIG offering follows a report published this January arguing for the retention of the universal NZ Super pension despite increasing KiwiSaver balances.
A series of earlier studies also tackled different aspects of the NZ retirement income system.
Chaired by convenor, Ian Perera, RIIG members include actuaries Alison O’Connell, Christine Ormrod, Dinushi Jayasuriya, and Kelvin Prisk.