Everyone knows they need to save for retirement, but financial planner Liz Koh says saving is only part of the story.
She says we need to think more broadly than that, because our goal should not be saving but building wealth.
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*Liz Koh is a financial planner and specialising in retirement planning. This discussion is of a general nature and does not constitute financial advice.
Saving to build wealth will put people in the strongest possible position for retirement, Koh says.
“One of the things we know for sure is by the time you retire, you really need to aim to have a debt-free property that you’re living in, because quite honestly NZ Superannuation is not enough to live on if you’re not in that situation.”
Once you have paid off the mortgage, then all you have to worry about is rates and insurance, she says.
“So, the sooner you can get rid of that mortgage, the sooner you can start doing some retirement saving.”
You also need to get into that habit of regularly putting money aside, she says.
“Initially while you’ve still got your mortgage, you might be saving to have an emergency fund on hand and to cover your short-term expenses, but probably most of your spare money is going to go on getting rid of your mortgage.”
Join KiwiSaver as soon as you can, Koh says, and maximise your benefits by making sure you’re putting enough to get the maximum tax credits and employer contributions.
“Making sure you’re in the right option for KiwiSaver [is critical to this wealth building process].
“A lot of people make mistakes around the fund that they’re in and we’ve seen a lot of that with all the volatility in the share market over the last wee while.
“People get a little bit nervous about volatility and they’re inclined to switch from more of a growth fund into a more conservative fund because they like to see their money stay constant or growing incrementally but that’s not necessarily a good long-term solution.”
Koh says investing in shares directly as opposed to using managed funds can open people up to more risk, but also more diversification.
“The thing is you want to be in something that has movement in the value, and that movement can be up or down.
“If you’re investing in something that is stable in value, you’re not going to make those returns so you do have to ride that volatility.”
The flipside to building wealth is making sure you hang on to it because as you age, you may come across situations that erode your wealth.
“This is where I see people make so many mistakes. People who finish their working career in not very good shape for retirement have often had some of these wealth-eroding things happen to them.
“If you’ve had health issues, for example, or the death of a spouse, that can erode your wealth.
“So, it’s really important to think about your life insurance cover, for you and your spouse, income-protected insurance, health insurance, because these things are going to help you hang on to the wealth you’ve built.”
The end or start of relationships, especially later in life, can hurt your pockets too, she says.
“It’s really important to make sure you’re protecting your personal financial assets in a relationship. And I guess especially if you’re in a second-time relationship, you may have already had your wealth halved, you don’t want to have it halved again.
“Particularly later in life, that can be a really hard thing to recover from and a lot of people just don’t.”
One of the best ways to create a lot of wealth is to leverage your savings, meaning you borrow more money to invest, Koh says.
“Using more than just your own resources because let’s face it, saving out of your regular income from employment is not going to get you a long way.”
The two key growth assets that make a serious amount of money are property and business, she says.
“The property market is going through a lot of ups and downs at the moment, but we’re talking here about long-term wealth building strategies and what you’ll find is that a lot of people set up a business to make money and then what do they do with the money they make out of that business? They use it to buy property.”
It’s not for everyone though, because not everyone will have the skills or capability to set up their own business, Koh says.
“That’s fine, [because] property does require a lot of research, it involves risk taking, borrowing money, but on the flip side you don’t get high returns without high risk.”
