In 2103 Martin Hawes, wrote a piece on NZ Superannuation. It was a well balanced article, and a we enter a period of low deposit interest and low inflation, worth reiterating.
Sunday Star Times 19 October 2013
THE GREAT GIFT OF NZ SUPER
OPINION: For the great majority of people, NZ Super is an important part of the financial plan.
Most of us do not want to be completely dependent on it, but NZ Super does, nevertheless, provide an excellent base retirement income.
You can apply for NZ Super at age 65 and it is paid at various rates depending on your tax rate and whether or not you are partnered or living alone. For a married couple both aged 65 and at the “M” tax rate the amount is $29,962 a year.
That would not be a great deal if that was your only income. However, because it is effectively Government guaranteed, inflation-proofed and paid for as long as you live, it does in fact represent quite a lot of money.
It is quite useful to think about the size of the lump sum that you would need to save to give you the same income as NZ Super gives. The numbers show that a married couple would need savings of slightly over $500,000 to achieve the same income as NZ Super: you would have to save about $500,000, invest it well to have the same retirement income.
There are some variables and assumptions that you have to make, but NZ Super payments are about the equivalent of receiving a lump sum of $500,000 which you invest at 3 per cent and run down to nothing over the 20 years of retirement. The amount that you could draw from this lump sum of $500,000 would be $29,000 a year increasing with inflation at 2 per cent a year.
This means that your right to NZ Super on retirement has a value of $500,000: for a couple, NZ Super is like a 65th birthday present of $500,000.
The annual payment of $29,900 may seem small for a couple to live on, but when you bring it back to a present value of $500,000 it is quite a tidy sum and would take a lot of saving for most people.
So, given the size and importance of NZ Super for most Kiwis, is it reasonable for you to rely on NZ Super – will it continue to be paid?
Many people think not and this uncertainty reflects the fact that for decades NZ Super has been a political football kicked all around the paddock.
I certainly expect that NZ Super will continue to be paid although the age of entitlement will probably be shifted at some point: in its simplicity and low cost, NZ Super is too good a scheme for the country to abandon.
It should be protected and treasured.
Whatever extension of the age of entitlement for NZ Super, it is likely to be very gradual and forecast well in advance. I think you can reasonably plan to have NZ Super in retirement.
Of course, most people reading this will not want to live solely on NZ Super – it may give enough income for subsistence in retirement but most couples will want more income than $29,600 a year.
You ought to be able to draw 3 – 7 per cent for income from the savings that you have accumulated – that is, for each $100,000 that you saved, you should have income of between $3000 and $7000 a year after tax. The actual amount will depend on investment fees, the investment risk that you take, future investment returns, your longevity and the size of the inheritance that you want to leave the kids.
Whether it is $3000 or $7000 a year for each $100,000 that you have saved, it will make an enormous difference to your lifestyle. Let’s say you have savings of $250,000 and you can draw 5 per cent a year: with NZ Super of $29,600 a year you will have total income of $42,100 after tax.
The difference between a $29,600 lifestyle and a $42,100 lifestyle is huge: some nights out, some travel and hobbies.
There are two important things to think about and plan for: first, every bit of savings will make a difference to your retirement lifestyle. NZ Super is your income base and will cover the basics, but additional amounts from savings are very important.
Second, effectively every New Zealander on retirement is given the present value equivalent of $500,000 regardless of what they have done through their working years. While not enough for a lavish lifestyle that will be the financial bedrock of most retirements.
NZ Super is a system so simple and cheap that we need to give people certainty and stop playing football with it.
Martin Hawes is an authorised financial adviser. A disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice
Posted by Alec Waugh- figures shown are approximate , a guide only.
Martin is right of course but that does not mean NZ Super is perfect, There is little justification for the different rates for example. Why should a couple get less than two singles who share and in any case what is a couple exactly in today’s modern world?
Then there is the ten year residency rule. Some new immigrants who may be very wealthy but are deemed to have no overseas pension can get NZS (worth $500,000 for a married couple) after a short time. Others who may not be well off can have all their NZS offset by an overseas entitlement.
Susan’s comment is correct, NZ Superannuation is not perfect, but Governments in this area often do a poor job, and seem to continually place a heavy hand on change, when minor adjustments only are required. My own experience is that NZ politicians including some key spokespersons are less than adequate in their knowledge of retirement income issues, and few with any historical perspective including trends over time or past legislative decisions and the rationale behind such initiatives.
The message for all the NZ Political parties, is the product -NZ Superannuation- is sound , alternatives suggested don’t get close, people don’t want too much change, but could support and live with minor changes/ adjustments, phased in over a suitable time span. A steady hand at the wheel, would seem attractive policy for political parties trying to attract the middle ground vote!
Alec Waugh
Martin’s figures can be applied equally to KiwiSaver. They make very interesting reading as projected figures by the ANZ are that women on average are likely to retire with $144,000 compared to $203,00 for men. According to Michael’s calculations this would give women 3%-7% of $144,000 as extra income above their NZS. Men would receive 3%- 7% of $203,000 as extra income. Using these figures I think both sexes would be struggling in retirement. Ivan Fay( treasurer KASPANZ)
The overall judgement I agree with, though I still have a question about universality. As long as well-off and reasonably well-off people continue to benefit we can expect the ‘simplicty’ argument will prevail against all contenders. I can’t test the detail, but I think the cost of means testing has probably been grossly exaggerated. I would love to see someone come up with numbers to disprove this. How do the Australian means testing costs stack up? RPRC: here’s a job if you want it 🙂
Michael
NZ Listener requested some comment from readers on Means testing, Kaspanz letter published in edited form, issue dated January 30, 2016
Why would you! NZ has the simplest and best Superannuation scheme in the world, low cost, universal, effective and efficient, taxable, and also gender neutral . Means testing is a costly and complex exercise, outweighing any perceived benefits of such an approach. New Zealand has one of the highest trust and asset protection scheme ratio’s in the world, camouflaging true family income and assets, and asset testing also introduces a “them and us” mentality. As Michael Littlewood of the Auckland. Retirement Policy and Research centre said “a universal pension is a simpler, more understandable, more transparent arrangement, one that is much cheaper to administer and more effectively deals to the reason we have a pension – to reduce or eliminate poverty in old age.
Posted Alec Waugh