By Roger Sutherland, Grant Thornton Wealth Management

Take your current level of income and multiply it by 70%. That’s what many people say they will need as a minimum to have a comfortable lifestyle in retirement. On top of that you will also need to allow for one off items such as replacing the family car every 5 years or so, as well as the occasional offshore adventure.

Healthier lifestyle choices and continual improvements in our medical care mean we are living longer, so our retirement provisioning will have to last a little longer than maybe it did for your parents

So let’s assume you are currently earning a good income of $200,000 pa. Applying the 70% ratio above then a typical retirement income would be $140,000, before tax. When we factor in the new tax rates effective from 1 October this year that will provide an after tax income of approximately $ 97,250 pa based upon a single person, or if you can income split with your partner then that increases to $107,700 pa net.

Of course under current rules you will get some help from the Government in the form of NZ Superannuation. Upon attaining 65 years of age you will receive a net figure of $16,542 pa if you are single and living alone, or if you are married $12,724 each pa. reducing the amount you will need to fund yourself to somewhere between $80,700 and $82,250 pa.                                         .

Next you need to make some decisions about your retirement capital. Do you want to have built up sufficient capital so that under normal market conditions it will comfortably produce the $80,000 – $82,250 shortfall year in year out leaving the capital base intact for future generations, or are you happy to consume a little of your capital base each year along the way.  If you do that you will still have the “lifestyle” assets to leave to the children which usually consists of the family home and the beach property.

So how much “retirement capital” will you need by age 65 years?

To do this calculation first we need to make some assumptions, such as typical earning rates, the period of retirement and as mentioned above whether that capital base can be used as you go or needs to stay intact.

By way of example:

$140,000 less tax (married couple)                                                     $107,700

less NZ super entitlement  (married couple)                                       $  25,449

Income to be provided from your own sources pa                             $  82,251

Assumed earning rate after tax, inflation and any other expenses say 3.00%

Period of retirement (65 yrs to 90 yrs )                                               25 years

Amount required by age 65 years if capital to be consumed             $1.4 million

Amount required by age 65 years if capital not to be consumed       $2.7 million

Next issue we will look at what sort of savings rates need to be established to reach these sorts of financial goals. In the meantime to see if your retirement planning is on track arrange for a complimentary financial checkup with your Grant Thornton Business advisory Partner or contact your local Grant Thornton Wealth Management Director today.