Retirement planning is an interesting conundrum

Over at the New York Times, there is a really good article about retirement planning – http://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html

That’s the trouble with this strategy. “Most of the time, you underspend,” said Mr. Pfau, who is also a principal at McLean Asset Management. “Yet you still run the risk of running out.”

A major problem New Zealand faces is that most people have a house and NZ super and basically nothing else. 92% of household wealth is allocated to housing. Only 8% is in financial assets. That is clearly not diversified, when you consider that New Zealand is not even 1% of the global equity and bond markets and nor is even Australia!

So the policy problem in New Zealand is that no one wants to cut their standard of living and we still have cradle-to-grave welfare mentality and old people are a massive voting block so the most likely scenario because lots of households don’t save enough for retirement is higher NZ Super payments paid for through higher taxes or borrowing.

A lot of people will have a rude awakening when they are forced through ill health or labour market conditions to reassess their standard of living when they have no safety net to fall back in until NZ super kicks in at 65 or later depending on how policy changes between now and then.

Maybe, just maybe, house prices won’t keep going up…just because Auckland house prices have kept going up for decades doesn’t mean house prices can’t go down and you can’t meet mortgage repayments. Thinking that New Zealand is “special” is a recipe for financial disaster.