Lifting the retirement age

Last month, China lifted the age of retirement for its citizens by 3 years for blue-collar workers and 5 years for white collar workers. If the New Zealand government were to make a similar change, will you be in a position to retire on your terms?

Pushing up the age of retirement

China joins a growing list of countries who have lifted their age of retirement, the most recent of which was France, as a rapidly ageing population and changes in life expectancy continue to foreshadow a growing debt burden for already constrained government finances.

In New Zealand, the current age of entitlement for NZ Super, and access to KiwiSaver, is 65. This compares against a retirement age of 67 in the US, UK and Australia.

While the sitting government (a coalition of three parties) made no change to the age of entitlement, in the run-up to the 2023 election one of Christopher Luxon’s campaign promises was to lift the age of entitlement to 67.

Number of people aged 65 and over per 100 people aged between 20 and 64

Source: OECD, Pensions at a glance, 2023.

This plan was similar to that proposed in 2017 by the sitting National government. They announced they would lift the age of entitlement to 67 if re-elected. At the time, the planned phase in period was 20 years, providing sufficient leeway for those impacted by the proposed change to prepare.

Given the relatively constrained government finances, the falling ratio of those working to those in retirement, and the rising costs associated with an ageing population, a lift in the age of entitlement or some kind of means test for NZ Super, whether now or in the future, is inevitable. This needs to be taken into consideration when planning for your retirement, especially with access to KiwiSaver also currently linked to the entitlement age for NZ Super.

Thankfully, time is one of your best friends when it comes to saving for retirement and the easiest way to make the most of compounding is by starting your investment journey today.

How much do I need to retire?

According to the 2024 Massey University study, a couple living in a metro area currently spend around $1,740 a week (choices budget). This is well in excess of the current level of NZ Super of $803 a week for a couple based on NZ’s lowest tax rate of 10.5%.

Based on this current weekly spend, and including NZ Super, we estimate that a couple would need a combined investment amount of $1.125 million by the age of 65 to see them through 25 years of retirement.

If the age of entitlement to NZ Super were to be lifted from 65 to 67, and assuming a couple still wished to retire at age 65, this would increase the amount required at retirement by $65,000 to $1.190 million.

If some type of means testing were to be introduced, which meant that you no longer qualified for NZ Super, then an additional $725,000 would be required by age 65 taking the total amount required at retirement to $1.850 million.

Nest egg required at age 65

The examples highlighted above are for illustrative purposes only given the likelihood of a change occurring without any lead in period is minuscule.

It is more likely that any change to the age of entitlement would be phased in over a period of time. For example, China is phasing in the changes to its retirement age over a period of 15 years.

As such, we have calculated what the potential impact of such a change would have on someone 35 years away from retirement (currently aged 30), 25 years away from retirement (currently aged 40), and 15 years away from retirement (currently aged 50).

Under each scenario we have assumed a zero-starting balance, retirement at age 65, and that the portfolio is fully drawn down over the 25-year retirement period.

The benefit of time means the savings requirement of someone aged 30 is far less than someone who starts saving for their retirement later in life. Lifting the age of entitlement to NZ Super to 67 for someone currently aged 30 would increase the amount required to be invested annually by $1,500 (from $29,600 to $31,100 per annum). For someone aged 50, the additional amount required to be saved annually increases by more than 2-times this, from $76,000 to $80,100 per annum.

If you wish to enjoy a retirement lifestyle, more than which is afforded by NZ Super, the easiest way is to start saving today. This will allow you to maximise the benefits of compounding, which sees not only your capital earn returns but your returns also earn returns. Time is the most important ingredient to compounding, so the sooner you start saving the greater the benefit will be over the life of your savings/investment period.

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