If you’re in your 50s, retirement might be fast approaching. You might find you’re sprinting to get your finances sorted in time. But there’s good news, says Pie Funds wealth adviser Simon Hepple.
“This is typically the period of your life when you are at your highest earning capacity. So if you’re behind in your retirement planning, you can catch up quickly,” he says.
How do you catch up?
Increase the portion of your income you’re putting aside for investment, says Hepple.
Even with only 15 years to retirement, you’ll still get the benefit of compound interest. Compound interest can boost your savings because you can get returns on the returns you earn, as well as on the money you started with.
What’s holding you back?
How much debt do you have?
Get rid of ‘bad’ debt. Make sure credit cards are fully paid at month-end, get rid of car loans and anything else you’re paying off.
Hit your mortgage hard. Accelerate your payments and, when it’s paid off, take the money you paid each month and put it into investments instead, he says.
“If you’re a business owner, now’s a good time to build an exit strategy to get the best price.”
How much will I need?
The amount you must save is determined by the lifestyle you expect in retirement, says Hepple.
If you want to live pretty much as you are now, many advisers suggest you’ll need around 80 per cent of your current income.
Kiwis in their 50s now should still get NZ Super at 65. Currently at the M tax code, the payments are $21,380 a year for single people, or $32,892 for a couple, where both qualify.
Where to invest?
Look again at how much risk you’re prepared to take with your investments, says Hepple. Most people dial back the risk from ‘aggressive’ or ‘growth’, to ‘balanced’ around this time, but it depends on your own personal situation.
“The overall value of your investments is likely to be a lot bigger now you’re closer to retirement, so you may be less willing to face short-term drops in your capital,” he says.
Average life expectancy is now well into your 80s. If you’re in your 50s, you’re not even two-thirds through your life.
Even if you plan to retire at 65, you don’t have to take all your money out then. You can keep your money invested, while drawing down an income, says Hepple.
Seek financial advice to help work out what investment risk is best for you.
Review your insurances. These can become very expensive at this age, says Hepple.
“If you no longer have dependent children or a mortgage, you may be able to reduce some of this cover, to free up your money to invest.”
If you plan to help your kids through university or into their first homes, plan the best way to do that, he says. The children could get an interest-free student loan, but you could help them reduce it, depending on their grades.
If you plan to help them buy their first home, consider whether it’ll be a gift, a loan, or if you’ll become a guarantor, using equity in your own home. Warning: Think hard before putting your own home at risk.
How am I doing?
Hepple has crunched the numbers for the average 50-year-old, assuming that someone is earning $75,000 in salary by the time they retire, and wants to earn 80 per cent of this in retirement.
As a rule of thumb, you should have saved about six times your salary at age 50, or 11 times your salary by age 60, to make sure you’re on track.
His figures assume:
- Someone starts earning $40,000 at age 20 and is saving 12% of their after-tax salary every year until 65
- Their salary steadily increases at a rate of 1.4 per cent per year, to $75,000 by the time they retire at 65
- They earn an average of 6% per year, after fees and tax on their investments until age 65 (note, this is a relatively high return and usually involves higher risk)
- They start drawing an income of $60,000 per year from age 65 onwards (80 per cent of their salary in retirement)
- The return on their investments drops to 3% pa in retirement to reflect more a conservative investment approach (lower returns and lower risk)
- Zero inflation rate
Published 23 July 2019
Simon Hepple is a wealth adviser for Pie Funds. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. All content is correct at time of publication date. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. Before relying on it, we recommend you speak with a financial adviser.