Chances are you are going to retire at some point.

The sort of retirement you're going to have? Well, that's up for debate.

Every day at Opes Partners we help regular Kiwis put together plans to help them achieve a comfortable retirement. And the question that continues to be asked is: "How much does retirement actually cost?"

In this article you're going to learn what retirement looks like for many New Zealanders, so that you can make the decision about what sort of retirement you would like to aim for.

Then, at the end of the article, you'll learn how to achieve this level of passive income so you can pay for it.

How Much Retirement Costs

How Much Retirement Costs

The amount retirement is going to cost you totally depends on the sort of lifestyle you want to live once you stop working. However, there are usually 6 types of lifestyle you could potentially lead based on the passive income you are able to attract.

What is passive income?

When you retire, by definition you stop working. So to still be able to live you need to be able to draw an income, without working for it.

You can achieve passive income by:

  • Drawing down your savings
  • Earning rental income from freehold rental properties
  • Earning interest on savings
  • Earning dividends from shares
  • Drawing superannuation
  • Receiving gifts from friends or family

You're going to learn two strategies to create passive income near the end of this article, but let's get into the 6 lifestyle types.

What will your retirement look like?

The 6 Retirement Lifestyles (and how much they cost)

There are generally 6 retirement lifestyles you can choose from. Each of the following lifestyle examples has a different level of passive income you would need to live that life.

No Lifestyle – No passive income

In the most extreme case, there is no lifestyle at all, where you have no passive income.

This would occur if the superannuation didn't exist and you had no other income or assets. In this case, unfortunately, you would live in poverty and be totally reliant on charity to provide the basic necessities of life.

While it's unlikely the government would reduce superannuation to this level, its worthwhile bearing this situation in mind.

Poverty Lifestyle – Passive income of $25,000 per year

This lifestyle is the same as what you would receive if you were single and living alone on the New Zealand pension.

Before tax, a single pensioner receives $950.84 a fortnight, or $24,721.84 a year.

This is enough to pay for food and the basic needs of life. But it assumes that you will also have no accommodation costs and that you'll be living in your own freehold home.

While you can live a very basic lifestyle, you will still be reliant on help from friends and family in order to have a decent quality of life.

Basic Lifestyle – Passive income of $50,000 per year

Provided you have your own home with no debt, you should be able to enjoy most of the basics in life without a lot of extras if you have passive income of $50,000 before tax.

It is likely you will still need to be careful with money, but you'll have the ability to travel short distances and save up for a holiday now and then.

Comfortable Lifestyle – Passive income of $75,000 per year

The third level is the Comfortable Lifestyle.

Provided you have your own home and no debt you should begin to live a relatively good life in retirement. You can eat out more regularly, have the money to do regular activities with your friends, or take the art class you've always wanted to.

Well-off lifestyle – Passive income of $100,000 per year

This level of income is where the fun starts, and you really begin to have choices. This includes the home you live in and the holidays you take.

For instance, according to New Zealand website, Travel Money, a 2-week trip to London costs about $9,000.

With the well-off lifestyle, this becomes an option for you every year, and you'll still have the ability to have choices when you are at home.

You can easily handle health concerns as they arise and pay for treatment if needed.

Affluent Lifestyle – Passive income of $150,000 per year

This next lifestyle allows you to enjoy a very high quality of living if you want to.

You can do exactly what you want and you have choices, from taking longer holidays through to driving new cars and having toys.

For instance, a new Jaguar XE starts from $75,900, which over a five-year period works out to $15,180 per year. Once accounting for resale value, you and your partner could both buy new cars every five years on this lifestyle.

Contribution Lifestyle – Passive income of $200,000 per year

This amount not only gives you a wonderful lifestyle but also gives you the ability to support your friends and family.

For instance, you would be able to pay for two of your grandchildren to go through private schools (about $25,000 a year each), and still be able to live the "affluent lifestyle" described above.

Which of these lifestyles appeal to you?

These lifestyles, of course, aren't set in stone, but are general guides that give you a sense about the types of lifestyle you might want to live, particularly when you are early in retirement.

The Rule of 20

How do I pay for these lifestyles?

If you're looking at these different lifestyles and wondering how you're going to pay for them all, you're not alone.

Once we walk people through the different lifestyles available to them, it's natural to want to know how to pay for it. This is usually based on the rule of 20*. This is based on the idea that if you can build an asset base then you can live off the returns of those assets in retirement.

How does this work?

Let's assume the average investment, whether it is property or a mutual fund could make your 5% return consistently per annum pre-tax. That means you'll need 20x your desired lifestyle income in assets so that you can fund your lifestyle forever.

That's because:

Asset value x 0.05 = lifestyle income.

If you can build that level of assets you won't have to worry about your retirement savings ever running out because each year you will be able to live on the returns your assets produce.

Say you wanted a "well-off lifestyle", like above of $100,000 of passive income every year. That means you will need $2,000,000 of assets (in today's dollars) to fund that lifestyle passively.

i.e. $2,000,000 x 5% = $100,000.

The key concern for most people who are planning for their retirement is: "How do I build up that level of assets?"

The answer is to invest in assets that will grow in value over time. This is one of the reasons many Kiwis choose to become property investors so they can build the assets necessary to live off in retirement.

If you'd like to know more about how to get started in property investment, then check out the Epic Guide to Property Investment.

*Note that this calculation purposely does not include the government superannuation or protecting your assets against inflation.


Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.