University of Otago Business School PhD student Jelita Noviarini is studying financial adequacy in retirement, looking at financial adequacy, financial literacy and behavioral aspects of post-retirement wealth management of New Zealanders.
The focus of her current research is on financial adequacy and wellbeing in retirement.
The reality is that New Zealand Superannuation really only covers basic living expenses like food and transport.
Private saving efforts are therefore important, especially when the level of New Zealand Superannuation (NZS) only covers roughly 40% of pre-retirement income for a median-income-earner according to OECD reports.
But voluntarily saving or increasing the amount of income saved for something many years away can be a difficult concept to understand. “It’s not easy for people in their 20’s to see what they need in 40 years’ time, and to understand that they have to save 12 to 15 percent of income from age 25,” Ms Noviarini pointed out.
Ms Noviarini used survey data from Statistics NZ’s Survey of Family, Income, and Employment (SoFIE) to look at figures from before and after the retirement age of 65, examining income and accounting for factors affecting retirement income including asset liquidity and saving in the form of housing.
She investigated the effect of three different options if retirees wish to release money from their investment in housing:
- Selling the house outright
- Downsizing the house to a smaller one (this is the only option if retirees wishes to bequeath their house).
- Setting up a reverse mortgage, where the bank takes an individual’s home as collateral and a homeowner can borrow money against the value of the home. Any excess from the house sale against the loan is returned to the borrower or to their beneficiary.
The results vary widely depending on location. Southland fared better than other provinces, as did women, those living with someone else, single or divorced/widowed individuals, and Pākehā and Asian ethnicities.
“Māori and those living in Auckland faced the biggest challenges.”
The findings indicate that currently 30 to 40 percent of New Zealanders will be financially adequate, however, her research shows retirement wellbeing becomes a big issue when housing is introduced into the retirement calculations, particularly for people who are paying rent. While NZS may be adequate for house-owners, it may not cover all expenses for renters, particularly in high cost areas such as Auckland.
It is also clear Māori are more vulnerable as they approach retirement.
“How much income is enough for retirement is subjective - there is not one best option. But it is clear that individuals need to assess their own circumstances, particularly if they want to maintain their pre-retirement lifestyle.
The key is to educate yourself. Work out what is important to you and whether the amount you are saving will afford you that lifestyle as a retiree, irrespective of whether you have investments or you are a renter. Don’t just rely on the government to work it out for you.”