Your 5 point checklist for future proofing your nest egg

Figuring out whether your nest egg will go the distance can be daunting, but there’s no time like the present to start future proofing.

By Hannah McQueen

Staring down the barrel of retirement can be both exciting, and nerve wracking.

You have a long list of things you’d like to do with your time when you have more of it, but you’re also about to move from building up your assets, to whittling them down - hoping they will last the distance. 

It’s something New Zealanders often do on a wing and a prayer. Research shows the vast majority of us don’t know how much we’ll need for retirement, let alone whether we’re on track to have it. Once you are retired there’s precious little you can do if there’s not enough, beyond cutting what you spend, which reduces the options you have for enjoying that time.

The good news is there’s plenty you can do to ensure your nest egg will last the distance. 

1. Understand how much you need

Before you can know if you’re on track to have enough in retirement, you need an idea of what ‘enough’ means for you. That involves understanding what your life currently costs, which costs will continue in retirement, and which will cease. For example, will you be mortgage-free by then? Will your children be financially independent? 

It also requires considering the lifestyle you want to lead in retirement, and if you want to help your adult children. Then there’s likely future costs like replacing vehicles, healthcare, and potentially retirement villages or assisted living facilities. The piece you don’t get to decide of course is how long you’ll live for! Ideally, provision for at least a 25-30 year retirement, because the goal is to ensure you avoid the stress of outliving your resources!  

Hack: Take your annual living costs (with no mortgage or kid costs), less $20,000 per person who is retired (which is a rough approximation of NZ Super’s contribution).  Multiply this shortfall by 25-30 years to get an idea of your ‘retirement number’.

2. Understand what you’re on track to have

It’s likely it’s a large number, so before you have a panic attack, determine how much you’re on track to have.  Start with what your KiwiSaver (or other pension funds) might be worth by retirement – which your provider should be regularly telling you based on your settings. This tells you the size of your savings gap, before you consider the future value of other assets you own (managed funds, direct shares, investment properties). Finally, look at your home - but treat this with caution. Typically, downsizing covers about 3 years of retirement living.  Once you’ve done these sums, fair warning – it’s likely there will be a gap! But the earlier we know that the more options you have to close it.

Hack: If you’ve been contributing at 3%, KiwiSaver should cover roughly 35% of your ‘retirement number’.  Multiply your future KiwiSaver balance by about 1.85 for a rough guide of what you need to build outside of KiwiSaver.  

3. Make the gap less daunting

Before we get to investing, there are other options to explore to close your retirement gap. Every dollar of efficiency you can find in your current lifestyle will reduce your retirement number. Getting mortgage-free faster also has a compound effect – reducing living expenses, your retirement number, saving you interest, increasing your savings potential, and opening investing opportunities. 

Hack: For every $5,000 of annual cutbacks, you reduce your retirement number by $125,000.  

4. Weigh up investment options

There are myriad investment options - what’s appropriate for you will depend on the size of the savings gap you need to close, how many years until you retire, the investment return that demands, tempered by the risk you can afford to take (and how much risk you can stomach!). 

Generally, to achieve a higher return, you need to accept a higher degree of volatility (AKA risk); but the less time you have, the less risk your situation can tolerate. So, don’t let your stomach for risk be the only guide, instead first pay attention to the return on investment you need, and then overlay all investment options available to you that can achieve that. Rank them based on their volatility or predictability to determine which option will serve you best.

For example, bank term deposits might appeal to your risk averse tendencies, but if the return is scarcely higher than inflation, especially after tax, it’s unlikely to be useful. However, if the investment is highly volatile, the ups and downs will make you lose your nerve, and the timing of when you need to access your money becomes riskier. 

5. Get independent advice

You only get one chance to prepare for retirement appropriately – so it’s important to see a professional adviser. They can help you model different scenarios, and stress-test your assumptions to ensure they’re not too rosy. Neither optimism nor crossing your fingers are effective ways to ensure your nest egg will deliver you a retirement you’ll enjoy – but developing a robust financial plan can be. 

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 Feature image: iStock/g-stockstudio

This article reflects the views and experience of the author and not necessarily the views of Citro. It contains general information only and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their personal circumstances before making any financial decisions.