Is a mortgage-free home the key to a comfy retirement?

For as long as I can remember there’s been a view, held by many Kiwis, that paying off the mortgage on your home is the key to a comfortable retirement. It’s an entirely understandable viewpoint. Some of the biggest costs that we encounter during our working lives – mortgage payments, house and contents insurance, rates, maintenance and the ongoing provision of utilities - are all wrapped up in the business of putting a roof over our heads. So it comes as no surprise that we would view the elimination of a mortgage, and the consequent freeing up of all of the money we’ve devoted to those payments, as the secret to retirement success.

But is it enough? In a word - no.

Certainly, paying off your mortgage is a great step toward ensuring your retirement security – but it’s only the start of what should be a much more detailed approach to this important phase of your life. Yes, being mortgage free means that your housing expenses will reduce – but so will your income if you don’t make any additional provision for yourself. According to the Commission for Financial Capability, 60% of kiwis above the age of 65 depend largely on the State funded pension for their retirement income and 40% have virtually no other income – and while we should be grateful that this system exists – the payments aren’t fantastic. Currently, state-funded Superannuation will pay you $411 per week (or $21,380 per annum) if you’re single; $316 per week ($16,446 per annum) if you’re in a relationship where the other party doesn’t qualify; and $633 per week ($32,892 per annum) if you’re a qualifying couple. These payments are ‘indexed’ to wages – which means that the value of Super, going forward, will remain consistent in real terms – but I doubt many people would regard these payments as the basis of a ‘comfortable’ retirement lifestyle – even with a mortgage free home.

So how much ‘should’ you have put aside to retire on? I’d suggest that the bare minimum requirement is to own your own home and have enough put aside to fund your lifestyle for around 25 years when combined with what the Government pays in Superannuation. That sum will differ for each of us depending on our expectations - but as a general rule (and assuming you’ll retire with a mortgage free home) you’ll probably want it to be enough to be able to draw around 70% of what you were earning on retirement. The median household income in New Zealand is currently around $105k per annum – which means a couple will need a capital sum of around $1 million ($1.837 million minus Superannuation) to live in a style which would be commensurate with how they lived during their working life. (to those who argue that this capital sum would earn interest over that 25 years – yes it would, but that interest would be largely offset by the effect of inflation – so the numbers stand).

$1 million is a scary number. It will be significantly more than what most of us probably thought we needed to put aside to be comfortable - and it's certainly not my intention to alarm you - but I want to provide a reality check, particularly for younger people who still have the time to prepare and plan.

So, what can you do?

Start saving early. Start contributing to Kiwisaver as soon as you start working – and contribute as much as you can afford. This should be drilled into our kids in primary school.

Buy a home. I know this is easier said than done – but buying a home should be the aspiration of every New Zealander. It’ll provide you with an asset on which to fund your lifestyle and changes while you’re working – and paying it off, prior to retirement, will significantly reduce your cost of living in your twilight years. Additionally (and frighteningly) for those who don’t retire with a mortgage free home – the amount you’ll need to have saved by retirement will be even higher because housing costs will be an ongoing consideration.

Invest in something. The hundreds of thousands of kiwis who own over 450,000 rental properties aren’t just providing a home for other New Zealanders – they’re also ensuring that they’re prepared for retirement. And if property investment isn’t your thing – find something else that you can get passionate about. I don’t care what it is - houses, business ownership, or shares – just pick something, learn everything you can about it, and start building a nest egg.

Obviously the numbers I’ve provided here are very generalised – so to get a better idea of exactly how much you need to have saved for your retirement – based on your age, income, lifestyle and circumstances = go to www.sorted.org.nz and punch in your numbers.

It could be the difference between living in some level of comfort - and just surviving.

- Ashley Church is former CEO of the Property Institute of New Zealand and writes on behalf of OneRoof.co.nz. Email him at [email protected]