Retirement Savings with your Employer I
Wednesday, November 24th 1999, 12:00AM
Remember that we’ll have more time on our hands, probably be more relaxed and look forward to a few more holidays. And this is what retirement is for. We don’t want to be sitting at home thinking we can’t afford to indulge in a hobby, have a day out, or a trip away.
As While there’s some years to go before retirement becomes an option, it’s important to consider whether we’re making sufficient commitment to a level of savings for retirement.
One way to do this is to write down all current income and all current expenses. Include things we have to spend money on regularly, like food, bills, health care, petrol etc. Then list the expenses that are irregular like house, contents and car insurance, rates, gifts for birthdays and special occasions. Then there are the things we like to spend money on, like holidays, entertainment, clothes, dining out or household appliances. Deductions can be made for non-retirement expenses; e.g. travel to work, children’s clothing, contraception. The current New Zealand Superannuation amounts can also be deducted. These are available from the Retirement Commissioner’s website www.retirement.org.nz.
Once this is done, a clearer picture of our own desirable income level in retirement is apparent. . If it’s more than we’re currently providing for, then it’s back to our current budget to see where we can find additional money to invest. Trimming spending to invest a little more now can make quite a difference to our savings in the long term. And long-term most of us are looking for financial security. So it’s worth a few small sacrifices along the way.
Useful investment strategies to reach your goals
Once we’ve identified how we can save a bit more money for retirement we’ll need to work out the best way to invest this amount. We may even improve the way we’re currently investing.
It’s important to invest with a clear goal in mind while at the same time maximising the value of our investments. Superannuation, or regular long term saving, is still one of the easiest and most effective ways to save for retirement. Superannuation through our employer is even simpler and more effective because:
- The employer may offer a dollar-for-dollar subsidy for any contributions we make
- The employer may meet the cost of administration fees
- Life insurance is often offered as part of the savings package
- Easy deduction from payroll means we never miss what we never see
- Group buying power is greater than that for individuals – so lower charges
- Access to diversified wholesale investment funds – better investment options
- The benefits are tax paid (in other words we’ve paid tax on the earnings before they are contributed to our savings, so all money we receive incurs no further tax liability)
- The savings are portable and in the case of some schemes can remain in the same scheme throughout our employment and into retirement.
Superannuation can be seen as complex and confusing. It’s good to have some understanding of the issues. You can gain this by reading articles in magazine or newspapers, or with the help of professionals - provided through the employer or a financial adviser. In this way it’s not difficult to increase our level of understanding in these matters, and to feel confident about our decisions. One of the most common questions asked is:
How much should I contribute to superannuation each year?
Our changing population demographics indicate the current level of benefits payable for GRI New Zealand Superannuation maywill not prove sustainable in 10 to 15 year’s time.
Leaving saving until ‘later’ could find us reacting to circumstances rather than anticipating and providing for them.
The earlier we start saving the easier it is. One, because it becomes a habit, Two, because the slow but steady accumulation of funds attracts significant growth in investment earnings or interest – our money is working for us and retirement savings goals are easier to achieveensures that you will have sufficient income in retirement to ensure that you have financial independence and are able to maintain your lifestyle into your retirement. (This is because of compounding interest – see examples below). If we start saving early, it’s not important how much is saved as long as some regular saving is planned. Even small amounts grow over time and form the foundation for increased savings as time goes on and our ability to save grows.
The following two examples show how compounding interest gives us a great return.
Example 1
Invest $20 per week for a child at birth to age 10 then stop
Total value at age 65 is $196,196
Total investment is $10,400 ($1040 per year). Total interest is around $185,000
Or
Invest $23 per week from age 20 to 65 then stop
Total value at age 65 is $195,738
Total investment is $53,820 ($1196 per year) Total interest is around $142,000
Example 2
Invest $40 per week (5% of a $40k salary) from age 21 to age 65 then stop
Total value at age 65 is $322,173
Total investment is $91,520 ($2080 per year) Total interest is around $230,658
Or
Invest $40 per week (5% of a $40k salary) from age 30 to 65 then stop
Total value at age 65 is $192,525
Total investment is $72,800 ($2080 per year) Total interest is around $119,725
Example 3
If in Example 2 the employer was also to offer a 5% subsidy on a $40,000 salary at 5% from age 21 to 65 then stop
Total value at age 65 is $537,063
Total investment by us is $91,520, total investment by employer is $61,013 (net of tax), total interest is around $384,530.
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