Is your savings rate good enough? The simple answer is: it depends. It depends on your age, income, lifestyle expectations, and retirement goals. But don’t worry, this article breaks down how to calculate your ideal savings target geared specifically for New Zealanders, offering actionable tips and real-world insights to help you reach your financial goals, whether you’re saving for a house, retirement, or just a rainy day.
Understanding the Importance of a Good Savings Rate
In New Zealand, the cost of living is steadily increasing, impacting our ability to save effectively. While precise national savings rate averages fluctuate (and can be difficult to pinpoint due to data collection methodologies), it’s generally understood that many Kiwis could benefit from a higher savings rate. A “good” savings rate isn’t just about putting away some money; it’s about building a financial safety net, achieving your life goals, and ensuring a comfortable retirement. But how much should you be saving? It’s more than just a number – it’s about aligning your savings with your aspirations.
Why Saving Matters in the New Zealand Context
Consider the unique challenges and opportunities in New Zealand. High property prices, especially in Auckland and Wellington, make homeownership a significant savings goal for many. Kiwisaver, our national retirement savings scheme, provides a solid foundation, but relying solely on it might not be enough for the lifestyle you envision. The earlier you start saving, the more time your money has to grow through the power of compounding. Even small amounts saved consistently can make a significant difference over the long term. Also, having savings provides a buffer against unforeseen circumstances, like job losses or unexpected health expenses, giving you peace of mind in an unpredictable world.
Calculating Your Ideal Savings Rate: A Step-by-Step Guide
Determining your ideal savings rate is a personal process and needs to be tailored to your circumstances. Use this step-by-step guide to help you calculate based on your current financial situation, your requirements and goals.
Step 1: Calculate Your Current Savings Rate
First, determine your current savings rate. This is the percentage of your after-tax income that you save each month or year. To calculate this:
1. Determine Your Net Income: This is your income after taxes and other mandatory deductions like Kiwisaver contributions, but excluding things like student loan repayments, which are debt service and not technically savings.
2. Calculate Your Total Savings: Include all your savings across different accounts. This includes:
- Kiwisaver contributions (both your own and your employer’s).
- Savings in bank accounts (everyday savings, online savings, term deposits).
- Investments in shares, bonds, or managed funds.
- Money put towards a mortgage (principal repayments only). This represents equity accumulation in your home.
3. Calculate Your Savings Rate: Divide your total savings by your net income and multiply by 100 to express it as a percentage.
Savings Rate = (Total Savings / Net Income) 100
Example:
Sarah earns $70,000 per year after tax. She contributes 3% to Kiwisaver, and her employer contributes 3% as well. She also saves $5,000 per year in a savings account and makes $8,000 in mortgage principal repayments.
Her Total Savings are:
Kiwisaver Contributions: $70,000 6% = $4,200
Savings Account: $5,000
Mortgage Principal Repayments: $8,000
Total Savings = $4,200 + $5,000 + $8,000 = $17,200
Her savings rate is:
($17,200 / $70,000) 100 = 24.57%
Step 2: Define Your Financial Goals
What are you saving for? Different goals require different savings rates. Common goals for New Zealanders include:
1. Homeownership: Saving for a deposit on a house is often the top financial priority. The size of the deposit you need will depend on the cost of the property you want to buy and whether you qualify for a low-deposit loan. Aim for at least 20% to avoid lender’s mortgage insurance (LMI) and get better interest rates. The Sorted website provides helpful tools for calculating how much you need to save for a deposit.
2. Retirement: A comfortable retirement requires significant savings. Consider factors like your desired lifestyle, potential healthcare costs, and how long you expect to live. Kiwisaver is a good starting point, but many people need to supplement it with additional savings and investments.
3. Emergency Fund: An emergency fund covers unexpected expenses like job loss, car repairs, or medical bills. Aim to have 3-6 months’ worth of living expenses in an easily accessible account.
4. Education: If you plan to pursue further education or have children you want to support through university, you’ll need to save for those expenses. Student loan debt can be a considerable burden, so the more you can save upfront, the better.
5. Other Goals: This could include travel, starting a business, or making significant purchases. Quantify these goals as much as possible. For example, estimate the cost of the trip you want to take or the initial investment needed for your business idea.
Step 3: Estimate Your Retirement Needs
Estimating your retirement needs involves several factors. It’s one of the more challenging aspects of financial planning, as it requires making assumptions about the future. However, even a rough estimate is better than no estimate at all.
1. Determine Your Desired Retirement Income: As a general rule, you’ll likely need around 70-80% of your pre-retirement income to maintain your current lifestyle. This is because some expenses may decrease (e.g., commuting costs, work-related clothing), but others may increase (e.g., healthcare, leisure activities).
2. Account for New Zealand Superannuation: New Zealand Superannuation (NZ Super) provides a base level of income for eligible retirees. As of 2024, the rate for a single person living alone is around $500 per week before tax source: Work and Income New Zealand. This amount is adjusted annually based on inflation and wage growth. Factor this into your retirement income calculations. Note that the amount you receive may be afffected by living with other people or being in a relationship.
3. Calculate the Required Savings: Subtract your expected NZ Super income from your desired retirement income. The difference is what you’ll need to fund from your savings and investments. There are many online retirement calculators available (e.g., on the Sorted website) that can help you estimate the lump sum you’ll need to accumulate to generate this income, considering factors like investment returns and inflation. One common “rule of thumb” is the 4% rule. This suggests that you can withdraw 4% of your retirement savings each year without depleting the principal (adjusted for inflation). Remember that the 4% rule is not a precise figure and should be checked with a financial advisor.
Example:
John wants to retire at age 65 and desires an annual retirement income of $70,000. He expects to receive $26,000 per year from NZ Super. Therefore, he needs to fund $44,000 per year from his savings.
Using the 4% rule, he would need a retirement nest egg of: $44,000 / 0.04 = $1,100,000.
Step 4: Factor in Debt
Debt can significantly impact your ability to save. High-interest debt, like credit card debt and personal loans, should be prioritized.
1. Prioritize High-Interest Debt: Pay off high-interest debt as quickly as possible. The interest you’re paying on these debts can eat into your savings potential. Consider strategies like debt consolidation or balance transfers to lower your interest rates.
2. Manage Mortgage Debt: While mortgage debt is often considered “good debt” because it’s secured by an asset, it’s still important to manage it effectively. Aim to pay more than the minimum repayment amount to reduce the principal faster and save on interest over the long term. Consider making extra payments when you can or refinancing to a lower interest rate.
3. Incorporate Debt Repayments into Your Savings Plan: When calculating your savings rate, factor in your debt repayments. If a large portion of your income is going towards debt, you may need to adjust your savings target accordingly. Once you’ve paid off your high-interest debt, you can redirect those funds towards savings and investments.
Step 5: Consider Your Age and Stage of Life
Your age and stage of life play a crucial role in determining your ideal savings rate. As a general rule, the earlier you start saving, the less you need to save each month to reach your goals.
1. Early Career (20s-30s): Focus on building a strong financial foundation. Aim to save at least 15% of your income, including Kiwisaver contributions. Prioritize paying off any student loan debt. Explore different investment options and start building a diversified portfolio.
2. Mid-Career (40s-50s): This is a critical period for boosting your savings. Aim to save at least 20% of your income, or even more if you’re behind on your retirement goals. Focus on maximizing your Kiwisaver contributions and other investment options. Review your financial plan regularly and make adjustments as needed. Consider getting financial advice.
3. Pre-Retirement (60s): Assess your progress towards your retirement goals. If you’re not on track, consider delaying retirement or reducing your expenses. Continue saving as much as possible and adjust your investment portfolio to be more conservative. Seek professional financial advice to ensure you’re on the right track.
Realistic Savings Rate Targets for New Zealanders
While the ideal savings rate is personal, here are some general guidelines tailored for New Zealanders, considering our specific economic context and the Kiwisaver scheme. These are starting points.
1. Minimum Savings Rate: 10-15% This includes Kiwisaver contributions. This is generally considered a bare minimum, especially for younger individuals who have time to catch up. It allows you to take advantage of employer contributions to Kiwisaver and build a small emergency fund.
2. Good Savings Rate: 15-25% This is a solid target for most people. It allows you to make significant progress towards your goals, including homeownership and retirement. It also provides a comfortable buffer for unexpected expenses.
3. Excellent Savings Rate: 25%+ This is an ambitious target that will put you in a strong financial position. It’s particularly beneficial if you have ambitious goals, such as early retirement or significant travel plans. It requires disciplined saving and careful budgeting.
Practical Tips for Increasing Your Savings Rate
Increasing your savings rate isn’t always easy, but it’s achievable with discipline and smart strategies. Look into how to maximise your savings and grow it in the face of the rising cost of living.
1. Track Your Spending: The first step to saving more is understanding where your money is going. Use a budgeting app or spreadsheet to track your expenses for a month or two. This will help you identify areas where you can cut back. There are budget apps specifically created by New Zealand’s money authorities that are useful.
2. Create a Budget: Once you know where your money is going, create a budget that allocates funds for essential expenses, debt repayments, savings, and discretionary spending. Stick to your budget as closely as possible.
3. Automate Your Savings: Set up automatic transfers from your checking account to your savings account or investment account each month. This ensures that you’re consistently saving money without having to think about it.
4. Reduce Discretionary Spending: Look for ways to cut back on non-essential expenses, such as eating out, entertainment, and subscription services. Even small reductions can add up over time. Consider things like making coffee at home instead of buying it, or cancelling subscriptions you rarely use.
5. Increase Your Income: Explore ways to increase your income, such as asking for a raise, taking on a side hustle, or starting a business. Any extra income you earn can be directed towards savings and investments.
6. Take Advantage of Kiwisaver: Contribute enough to Kiwisaver to maximize your employer’s contributions and receive the government’s annual member tax credit. This is essentially free money that can significantly boost your retirement savings..
7. Shop Around for Better Deals: Compare prices on things like insurance, utilities, and groceries to ensure you’re getting the best deals. Even small savings can add up over time. Also, consider using comparison websites to find the best deals on things like electricity or internet.
8. Avoid Lifestyle Inflation: As your income increases, resist the urge to increase your spending proportionally. Instead, direct the extra income towards savings and investments. This will help you reach your financial goals faster.
9. Set Realistic Goals: Don’t try to overhaul your spending habits overnight. Start with small, achievable goals and gradually increase your savings rate over time.
10. Review Your Progress Regularly: Track your progress towards your savings goals and make adjustments as needed. Celebrate your successes along the way to stay motivated.
Case Studies: Savings Success Stories in New Zealand
Here are a few hypothetical case studies illustrating how different individuals in New Zealand have successfully increased their savings rates and achieved their financial goals:
Case Study 1: The Young Professional (Sarah, 28)
Sarah is a marketing executive earning $65,000 per year. She has $20,000 in student loan debt and wants to save for a house deposit. Initially, she was only saving 8% of her income (including Kiwisaver). She started tracking her spending and identified several areas where she could cut back, such as eating out and entertainment. She also took on a freelance marketing project on the side. By making these changes, she increased her savings rate to 20% of her income. After 3 years, Sarah had paid off her student loan and saved a $50,000 deposit for a house.
Case Study 2: The Mid-Career Couple (Mark and Lisa, 45)
Mark and Lisa are a married couple with two children. Mark is a teacher, and Lisa is a nurse. Their combined income is $120,000 per year. They have a mortgage and want to ensure they have enough savings for retirement. They realized they were behind on their retirement savings goals. They consulted with a financial advisor, who helped them create a comprehensive financial plan. They increased their Kiwisaver contributions, reduced their discretionary spending, and started investing in a diversified portfolio of shares and bonds. Over the next 15 years, they were able to significantly increase their retirement savings and are now on track to retire comfortably.
Case Study 3: The Pre-Retirement Saver (David, 62)
David is a self-employed builder who is planning to retire in three years. He owns his own home but has minimal retirement savings. He realized he needed to take drastic action to ensure he had enough money to live on in retirement. He decided to work longer hours, sell some assets he no longer needed, and significantly reduce his expenses. He also sought advice from a financial advisor, who helped him consolidate his debts and invest his savings in a conservative portfolio. Through his efforts, David was able to build a sufficient retirement nest egg and retire on his own terms.
Navigating the New Zealand Financial Landscape
Saving in New Zealand requires navigating specific financial products and policies. A deep understanding of the New Zealand financial landscape is necessary if one wants to adequately prepare for the future.
1. Kiwisaver: This is New Zealand’s national retirement savings scheme. Employees are automatically enrolled, but you can opt out. You can choose to contribute 3%, 4%, 6%, 8% or 10% of your salary, and your employer is required to contribute at least 3% (before tax) as well. The government also provides an annual member tax credit of up to $521.43 if you contribute at least $1,042.86 during the year. Kiwisaver funds are locked in until retirement age (currently 65), but there are some exceptions, such as for first-home purchases.
2. First Home Grant and First Home Loan: The government offers assistance to first-home buyers through the First Home Grant and First Home Loan initiatives. The First Home Grant provides a cash grant of up to $5,000 for individuals or $10,000 for couples to help with the deposit on a new or existing home. The First Home Loan allows eligible first-home buyers to purchase a home with a deposit as low as 5%. Eligibility criteria apply, including income caps and property price limits.
3. Tax on Investment Income: Investment income in New Zealand is generally taxable. Interest earned on savings accounts and term deposits is taxed at your marginal tax rate. Dividends from shares are also taxable, but you may be able to claim imputation credits to offset the tax. Capital gains (profit from the sale of assets) are generally not taxed in New Zealand, unless you are deemed to be in the business of trading property.
4. Inflation: Inflation erodes the purchasing power of your savings over time. It’s important to consider inflation when setting your savings goals and choosing investment options. Look for investments that have the potential to outpace inflation, such as shares or property. The Reserve Bank of New Zealand actively manages inflation through monetary policy tools.
5. Financial Advice: Consider seeking professional financial advice from a qualified financial advisor. A financial advisor can help you assess your financial situation, set realistic goals, and develop a plan to achieve them. They can also provide guidance on investment options and help you navigate the complexities of the New Zealand financial landscape.
Common Mistakes to Avoid
Here are some common savings mistakes that many New Zealanders make, and how to avoid them. It’s important to avoid mistakes to ensure you meet your financial goals.
1. Not Having a Budget: Without a budget, it’s difficult to track your spending and identify areas where you can save. Commit to creating and sticking to a budget.
2. Living Paycheck to Paycheck: Relying on each paycheck to cover your expenses leaves you vulnerable to financial shocks. Build an emergency fund to cover unexpected expenses.
3. Ignoring High-Interest Debt: High-interest debt can quickly eat into your savings potential. Prioritize paying off high-interest debt as quickly as possible.
4. Not Taking Advantage of Kiwisaver: Kiwisaver is a valuable tool for retirement savings. Contribute enough to maximize your employer’s contributions and receive the government’s annual member tax credit.
5. Keeping Too Much Cash: While it’s important to have an emergency fund, keeping too much cash in a low-interest account can erode its value over time due to inflation. Explore opportunities to invest your savings to generate higher returns.
6. Not Diversifying Your Investments: Putting all your eggs in one basket can be risky. Diversify your investments across different asset classes to reduce risk.
7. Panicking During Market Downturns: Market downturns are a normal part of investing. Avoid making emotional decisions during these times. Stay focused on your long-term goals and consider seeking advice from a financial advisor.
8. Not Reviewing Your Financial Plan Regularly: Your financial situation and goals may change over time. Review your financial plan regularly and make adjustments as needed.
9. Delaying Saving For Retirement: It’s a normal issue to delay saving for retirement, you must start with small, achievable goals. It’s better to start doing something today than put things off until later!
FAQ Section
Here are some frequently asked questions about savings rates in New Zealand:
Q: What is a good savings rate for a 30-year-old in New Zealand?
A: A good savings rate for a 30-year-old is typically between 15-25% of your income, including Kiwisaver contributions. This allows you to make significant progress towards your goals, including homeownership and retirement.
Q: How much should I have saved by age 40 in New Zealand?
A: A general guideline is to have at least 3 times your annual salary saved by age 40. This provides a solid foundation for retirement savings.
Q: Is Kiwisaver enough for retirement in New Zealand?
A: Kiwisaver provides a good starting point for retirement savings, but it may not be enough to fund a comfortable retirement. Most people need to supplement it with additional savings and investments.
Q: What are the best ways to save for a house deposit in New Zealand?
A: Consider using a high-interest savings account, term deposit, or Kiwisaver (if eligible for first-home withdrawal). Automate your savings and make regular contributions to your deposit fund.
Q: How can I get free financial advice in New Zealand?
A: The Sorted website provides free and impartial financial information and tools. You can also access free financial mentoring services through various community organizations.
References
Sorted.org.nz
Work and Income New Zealand
Reserve Bank of New Zealand
Ready to take control of your financial future? Don’t wait another day to start improving your savings rate. Take action now! Start by tracking your spending, creating a budget, and setting realistic savings goals. If you can start saving now, then you will ultimately be able to reach your financial goals sooner. Secure your future by investing in it today.
