Cost of living: New Zealanders will need to save up to $755,000 to get by in retirement - report

Inflation is becoming a significant factor as New Zealanders plan for their retirement and Kiwis are advised to save wisely and sooner if they want to have enough money.

Massey's New Zealand Financial Education and Research (Fin-Ed) Centre has released its annual Retirement Expenditure Guidelines, which helps pre-retirement Kiwis make financial plans for their future.

The latest edition reports that with inflation rising to 7.3 percent in the 12 months to June 30, 2022, this could be of particular concern for those planning or nearing retirement.

The Consumer Price Index (CPI) increased by 6.9 percent for the year to March 31, 2022, with the New Zealand Superannuation increase being less, at 5.95 percent. 

While levels of expenditure in most household categories have exceeded the New Zealand Superannuation in past reports, this year's report found the difference has increased further for all household groups.

The guidelines show levels of expenditure by current retirees categorised by being a 'no frills' retirement, which reflects a basic standing of living with few, if any, luxuries, or a more comfortable standard of living referred to as 'choices'.

The estimated lump sum savings required to fund a two-person 'no frills' household living in a city sits at $191,000 and $77,000 for a couple living in the provinces. A two-person 'choices' household in the city would require $755,000 while a provincial 'choices' household needs $480,000.

The household groups in this survey show that many New Zealanders wanting to have a certain standard of living in retirement will need to supplement their superannuation to do so and must also now factor inflation into their preparations.

Report author Associate Professor Claire Matthews from Massey Business School said although higher inflation rates are not a new phenomenon, the most recent CPI increase is the highest it has been in New Zealand since 1990.

"Rates of inflation at this level are not unusual, but it is markedly higher than our recent experience. When we look at historical trends, there was an average annual CPI increase of 12 percent between March 1971 and December 1989," she said.

"However, comparing that to the last three decades, it puts it into perspective as there was an average annual CPI increase of 2 percent between March 1991 to December 2020."

In part, the current rate of inflation reflects the ongoing impacts of the pandemic and the war in Ukraine, with key drivers including increasing energy prices, rising wages, and supply-chain disruptions, the report said.

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The legislated adjustment process for NZ Superannuation is guided by measuring CPI, which can provide some reassurance, yet Prof Matthews said this method can understate the actual level of inflation that retirement households are facing.

"For people on a fixed income, such as those receiving NZ Superannuation, inflation can be a huge concern because their income may not be increasing at a rate that keeps up with increases in expenses," she said.

"CPI is measured using a particular basket of goods and services, but the expenditure patterns of our retired households don't match the CPI basket, meaning the NZ Superannuation adjustments may not fully compensate for the increased costs."

The report outlines further inflation-related issues alongside erosion of purchasing power that can affect those near retirement, including increased volatility in the stock market leading to reduced value of investments.

The main contributors to the continued rise in costs for retirees for the 12 months ending June 2022 were transport, housing, household utilities, and food. Recreation and culture was also a key inflationary driver for the 'choices' households due to a higher proportion of expenditure represented relative to the CPI.

Prof Matthews said it's important for New Zealanders to start planning and taking action now if they want to achieve a particular style of living in retirement.

"Retirement is a significant life change. Without the right preparation and planning, it can be hugely challenging to achieve a certain way of living retirees may aspire to," she said.

"This is where reviewing your expenditures and making mindful spending choices can help. It's also important to think about where your funds are invested, and engage with a financial advisor who can help with navigating a high inflation environment."