Itâ€™s an interesting thing this â€˜Poverty Cycleâ€™ phenomenon. I thought it was just something we speak to our clients about how to get out of â€“ Until I Googled it recently! Unfortunately itâ€™s very real terminology, known the world over!
So, what is the â€˜Poverty Cycleâ€™?
Simply put, the poverty cycle is when people are in a position where they are trapped living from pay-cheque to pay-cheque with no surplus income in the mix.
I wonder if the rest of the worldâ€™s Westernised countries have a situation like we have here in NZ? More than 85% of Kiwis are in the Poverty Cycle where after all expenses have been paid and the cost of funding your lifestyle is taken care of, families save nothing towards retirement. As a result, they will reach 65 with absolutely zero savings. This is not a scare-tactic, this is straight from Statistics New Zealand.
I know these stats to be real because I take on clients week in, week out who have no savings plan and no nest egg building up. Kiwis donâ€™t save! Donâ€™t kid yourselves and think that KiwiSaver will be enough. Unless youâ€™ve been paying in 10% (including your employerâ€™s contribution) since your early 20s, it will not be enough. Considering youâ€™d need a minimum nest-egg of about $1M to fund a passive income in retirement per year thatâ€™s anywhere near the average income in NZ â€“ youâ€™re going to fall short. Check out this link, put your KiwiSaver invested amounts in, factor for say a 6% per annum growth, and see if you come anywhere near $1M:
What did your amount come to? Anywhere near $1M?
Look â€“ Iâ€™m not trying to scare you here. But, weâ€™re not even factoring for inflation in the above scenarios. Remember that every year that rolls by, your dollar buys you about 3% less than it did the year before. If youâ€™re not retiring for more than say 15 to 20 years â€“ You can pretty much double the amount you think you can live per year right now because of inflation.
Take a look at this video I put together. It discusses the Poverty Cycle in detail. It briefly touches on ways to get out of it by paying less tax and having savings plan in place. Itâ€™s also important to think about some of the ways that you can decrease your costs to make your lifestyle more sustainable when you retire.
Sorted.co.nz also has some excellent resources to help you plan ahead for retirement and some useful calculators to help you work out how much money you need to be putting away now.
Over the last few years, the government has put a lot of effort into encouraging people to join a Kiwi Saver retirement scheme and many New Zealanders have now joined this scheme. The official Kiwi Saver website gives you a good introduction to the scheme and unpacks some of the important details. Interest.co.nz also has some excellent articles about Kiwi Saver. If you are not in a retirement savings scheme, youâ€™d be well-advised to contact an authorised financial adviser to get some good advice on how best to save for your retirement.
Approaching retirement doesnâ€™t need to be terrifying but it does require planning ahead and starting early. If you want to have a comfortable retirement, this is the best advice I can give you!
Iâ€™d love to hear some of the ways that youâ€™re planning for your retirement. Are you in Kiwi Saver or another savings scheme? Does it work for you? What other things are you doing to prepare for your retirement?