Throughout each generation, we have been told about the importance of saving up for our retirement. However, even though this has now become common knowledge, people still fail to take the necessary steps to secure their future.
Now that it’s the Millennials’ turn under the spotlight, how will they fare in terms of preparing for their retirement?
Figures based on Massey University's annual retirement guidelines, state that Kiwis need to have $25,000 in their KiwiSaver account by age 30, to even have a ‘no-frills’ lifestyle when they retire.
To live a more extravagant lifestyle, including an occasional holiday, they’d need to increase savings significantly: to an estimated $101,000 in a 30-year-old’s KiwiSaver account. That’s four times the earlier estimate. (Note that these figures are completely separate from government superannuation payments.)
Below are two examples based on real-life accounts of Millennials and their perception of financial security, based on their different backgrounds. Following each example, is an Adviser’s opinion on what that person could do to improve their financial position.
Carlos is in his late twenties and currently rents a flat with his partner. He's been in the workforce for several years now and has seen his income increase fairly regularly. During that time, he managed to pay off his car and a significant portion of his student debt.
Seeing the recommended KiwiSaver savings shown on Massey University's study gave Carlos a much needed financial wakeup call. However, he's already stuck with preparing himself for the potential obligations that may follow with starting a family.
Nevertheless, Carlos still follows his financial routine of consistently saving money where he can (he doesn’t know exactly what he’s saving up for). But, he’d rather have the financial resources to capitalise on opportunities that may present themselves, as well as being able to soften the blow of emergencies that may happen.
‘From what I can see, Carlos probably had a budget in place while he was paying for his car. Now that he has paid off the car, the money that he normally set aside for the loan is now extra cash. When this happens, the typical response is to use this extra cash to improve our lifestyle.
Instead, assuming that he and his partner’s plan to have a family is still a while away, I would recommend that he reinvests this money into savings; by increasing his KiwiSaver contribution, saving up for a mortgage, or paying off his student loan faster. The same advice will also apply if he is able to increase his income over time.’
Kate is in her mid-twenties and lives at home with her family. Although she'd like to move out and rent a place for herself, it makes more sense to live with her family, than pay for rent. This has allowed her to save more aggressively and increase her KiwiSaver contributions well above the minimum.
Looking at the amount of money she was able to save, she's considering buying her first home together with her partner in the next few years. However, upon glancing through the recommended KiwiSaver savings for retirement, she has started to have doubts as to what her next move should be.
Although Kate can draw from her KiwiSaver to purchase her first home, she is worried at how much this would set her retirement fund back. At the same time, she’s also aware that buying a home sooner rather than later, could mean their property would increase in value.
It is good to see that Kate is in the mindset of taking full advantage of the extra savings she is able to make from not having a rental expense. This can lead to her having both a solid starting point to purchase a home and a more secure future.
While reaching this recommended KiwiSaver threshold is a good benchmark to estimate your future financial security, it shouldn’t stop her from exploring other and potentially more beneficial investments such as property.
When it comes to getting a loan, it’s worth noting that there are ways you can structure it to fit your current situation. So, if Kate does decide to go for a mortgage, it is important to consider structuring her lending in a manner that will allow her to pay it off quickly whenever she is able to, while giving her access to funds in case of an emergency.
As for Kate’s concerns about reaching the KiwiSaver threshold on time, she should also consider that her income should naturally increase over time. This means that even though investing in property early may set her KiwiSaver back, she will have over 30 years of potentially bigger income, which can go towards her retirement savings. Doing this successfully, will give her the security of a property, as well as a healthy retirement fund.’