What’s a wealth gap?

One of the central premises of our new book, Wealth Plan, is the idea of a “wealth gap”.

A Wealth Gap is the difference between how much your retirement will cost and what you’re currently on track to achieve (financially speaking).

So, if you continue doing exactly as you are now, how much money will you have by the time you retire, and will it be enough?

And if you don’t have enough – that’s called a Wealth Gap.

Spoiler alert: Most Kiwis have a Wealth Gap.

In this article, you’ll learn what a Wealth Gap is, why most Kiwis have one, and how to close that gap before it’s too late.

As part of this book launch we’ve released our in-house software MyWealth Plan to help you run the numbers. Head to mywealthplan.opespartners.co.nz for the link.

What is a “Wealth Gap”?

A Wealth Gap is when there is a difference between the desired retirement lifestyle you want and what you’re on track to achieve.

Here at Opes Partners we sit down with over 2,000 Kiwis a year to plan for their retirement. The vast bulk of these New Zealanders aren't investing enough to live the retirement they want.

The thing is, we all know we need to invest more, we just …. well, don’t.

The way you close your Wealth Gap is by acquiring more assets to build your wealth. And to do this you need a Wealth Plan (hence the name of the book).

A Wealth Plan details how you’ll achieve your financial goals and includes:

• Identifying the retirement lifestyle you want

• Determining how many assets you’ll need to fund that lifestyle

• Figure out how many assets you’re on track to have

• See whether there is a wealth gap

• And if there is, setting the plan for how to get the extra assets required.

What happens if I don’t close my Wealth Gap?

If you don’t close your Wealth Gap you will be poorer in retirement than you want to be, without sounding too blunt.

Let’s say you currently dream of spending your later years sipping cocktails on a beach before playing rounds of golf and having lunch at your favourite restaurant. That’s not going to happen if you only have the NZ superannuation to fund it.

It just isn’t going to cut the mustard.

In fact the pension alone won’t even fund a relatively basic lifestyle. According to Massey University retirement guidelines, the superannuation falls short by about $163 a week.

Let’s explain this in a bit more detail.

If you plan to retire at 65 and live until 90 (fingers crossed), you’ve got 25 years of non-working life.

The latest research by Massey University says a relatively cheap ‘no-frills’ retirement lifestyle costs $605 a week (for a single person living outside the main cities).

Because superannuation is currently $437, that means the average retiree living alone will still be $163 a week short.

Now not everyone wants to live the ‘no-frills’ lifestyle. And similarly, not everyone wants the cocktails on the beach, the golf and the restaurants. Some people just want a ‘comfortable’ retirement.

Whatever a ‘comfortable retirement’ looks like for you, if you don’t close your Wealth Gap it’s not going to happen.

If you don’t have enough money to fund the retirement lifestyle you want, you will have to accept less.

What does a Wealth Gap look like?

To answer this question, let’s use an example of Peter and Sam, a “typical” 45-year-old couple who both plan to retire at 65.

Now, Peter and Sam are financially prudent, and have saved $60,000 through their collective KiwiSavers (matched at 3% by their employer) and they've got a household income of $120,000.

They haven’t started investing (or planning) for their retirement yet. But after reading our book, Wealth Plan, they decide they want to spend $1500 per week in retirement.

Essentially, this is the “choices” lifestyle identified in the Massey University expenditure guidelines, which is a comfortable lifestyle. This means spending $1,470 a week for a couple living in the main centres.

Now let's assume they plan to live to 90, so will have 25 years in retirement to fund.

Right now, Peter and Sam’s plan is to:

• Pay off their home and become mortgage free

• Live on the NZ superannuation, and

• Keep contributing to their KiwiSavers.

Doing all of that, Peter and Sam will be able to spend $920 a week. That’s $580 less than they want to every single week, for the next 25 years.

To live the retirement lifestyle they want, Peter and Sam will require about another $750,000 in assets by the time they turn 65 (in today’s dollars). And that’s assuming that superannuation is still 65 in 20 years’ time.

So Peter and Sam’s Wealth Gap is just over $750,000.

This number can sound a bit shocking. But, that’s just the maths of it. Initially, Peter and Sam had a very similar plan to many other Kiwis – pay off the mortgage, get the pension, invest in KiwiSaver. Yet even after that, they will still be almost $750,000 short.

But, to make matters worse, this presumes that superannuation continues to start at 65 and increases by inflation.

But, many Kiwis worry that the superannuation system will change over time, and may not be available in its current form by the time they stop working. For example, the National Party’s current policy (at the time of writing) is to raise the age of eligibility to 67.

Because of that, some of the investors we work with treat superannuation as a bonus, and don’t factor that money into their retirement plan. Or, they want to stop working earlier and so superannuation won’t be available at the point they retire.

How do you close your Wealth Gap?

To close your Wealth Gap, you need more money. And you get that by investing in more assets that grow in value over time.

This could be shares, funds, savings or any other asset class that works for you.

But, the option that a lot of Kiwis choose is investment property. That’s what we focus on here at Opes Partners too, so we’ll stick with investment property for the rest of the article.

It’s a misconception that you need 10+ properties to retire well. You don’t.

In practice, most investors find they will be set up for a comfortable retirement with just 2-5.

Let’s go back to Peter and Sam. As we’ve stated, they’ve got 20 years to go before they both plan to retire.

This time, let’s break it down by week. So, they’ve got their superannuation and KiwiSaver all ready to go.

• Superannuation $712 a week.

• KiwiSaver $208 a week.

This is a total of $920 a week.

But because they want at least $1,500 a week in retirement, Peter and Sam are short by $580.

So, they buy two properties:

• Investment property #1 – a $600,000 townhouse in Christchurch

• Investment property #2 – a $900,000 apartment in Wellington.

In 20 years time these properties are likely to have increased in value. Peter and Sam then have the option of selling the properties, paying back the bank and the real estate agent, and then living off the rest.

Based on standard mathematical projections, Peter and Sam would have $1,077,000 in equity left over. More than the $750,000 needed.

That money would provide an extra $829 a week for Peter and Sam to live on.

Combine that with the NZ Superannuation and KiwiSaver and Peter and Sam can spend $1,749 a week.

That’s about $250 a week more than what they initially thought they could spend.

How do I calculate my wealth gap?

It takes a lot of number-crunching to calculate your Wealth Gap. And here at Opes Partners we had to create our own piece of software to run the calculations for the investors that we work with.

As part of the release of our book, we’ve now released this software to the public (for free) so you can run your numbers.

So, to calculate your Wealth Gap head to: mywealthplan.opespartners.co.nz.

Do I have enough time to fund the retirement I want?

This article has thrown around a lot of numbers, which can sound really scary.

But this article isn’t designed to be negative; instead it's to encourage you to think about what happens when you stop working.

Once you know what your Wealth Gap is (and whether you’re on track for it) you can start to work towards it. Then it becomes about closing your Wealth Gap as quickly as possible.

Most, if not all, ordinary Kiwis have a gap between their future aspirations and what they’re on track for. And that’s normal.

This is why you’re talking to a financial adviser about how to achieve your aspirations through property.

There is a lot of potential to achieve a huge amount through property if you start doing it now and hold property for as long as possible.

The key thing is, don’t leave it too late. Start thinking about your retirement now, and work towards making it a reality.