This article was published on 23 October 2004. Some information may be out of date.

QRecent columns about the right amount of income that is appropriate in retirement got me thinking.

When we found out I was pregnant with our first child we decided that I would be a stay-at-home-mum once I had the baby. But while I was pregnant I had my salary credited straight into our mortgage account, over and above regular mortgage payments.

This enabled us to get used to living on one salary before it became a reality, but more importantly gave us a smaller mortgage to deal with once it happened.

I wonder if this scenario would also work for people nearing retirement. For the last few years of work, they could try and reduce their spending down to the post-retirement income they expect to have.

The additional money they are not spending will be added to their nest egg and the shock of the reduced income will not be such a hard reality.

AGreat idea. There are, of course, some differences in expenses pre- and post-retirement. But one retired couple recently said they found the lower transport, clothing and other work-related expenses roughly equalled their extra spending on leisure activities and medical care.

What’s more, if a soon-to-be retired person finds they can’t cope on the lower income, they may postpone retirement for a while, or plan to work part-time during retirement.

This makes a big difference to how much savings you need, according to a recent MoneyOnline newsletter.

It gives an example of a single woman planning to retire at 65, after which she wants after-tax income of $30,000 a year from all sources, including NZ Super.

If she stops all work at 65, she would need to save $263,000 by then. But if she earned $10,000 after tax each year from 65 to 75, she would need to save only $172,000 by age 65. And if she increased the income to $15,000 a year, she would need to save only $108,000.

This assumes:

  • NZ Super payments will keep pace with inflation. Currently, they grow with wages, a bit faster than inflation.
  • The woman will use up all her savings if she lives to 90, which is five years past her life expectancy. After that, she would still get NZ Super.
  • Investment returns will be 3 per cent a year after tax and inflation.

I know it’s not always easy for 65-pluses to find work, but there are lots of ways to earn small amounts.

QI was interested in a recent reader’s letter that asked you about the fairness of the tax treatment of married couples and singles. I would be interested in your views on personal tax and children.

Let’s consider two families. Mr A earns $100,000 a year, Mrs A earns $60,000, and they have no kids. Mr B also earns $100,000 a year, and Mrs B stays at home and looks after their four children.

My understanding is that Mr A and Mr B would both pay the same income tax, of about $28,000 each, and Mrs A would pay about $14,000. Family A has a net $118,000 to feed two people, and Family B has a net $72,000 to feed six people. Is this fair?

My wife and I have four children born in the UK in the 1970’s and 80’s. My wife gave up work on the first birth and I had the easier role of earning money to feed and cloth the family. My taxable income was reduced for each child, and we also had a weekly fixed benefit for each child. The system recognized the cost of having a family.

People on benefit receive a weekly allowance for each child — this is reasonable but is it consistent? So we provide birth incentives to people that do not work and disincentives to those that do work. What would Charles Darwin think of this? I was quite horrified to hear that 15 per cent of children are in families where no-one works, the majority being solo mothers.

Government Statistics advise that, despite mortality improvements, the population will start to shrink in about 40 years from now as a result of low birth rates. Is this a surprise?

ADo you really want people having more children because they get a tax break? I don’t.

In any case, the system is not as inconsistent as you think.

Welfare has to be paid according to need. If we paid all families on benefits the same amount, we would either have families with no kids getting more than they need, or families with lots of kids getting less than they need. Neither is OK.

For working families, though, there are also Family Support tax breaks, and they are being boosted gradually until 2007.

“Almost all families with incomes below $45,000 a year will get more money, along with a large number of families with incomes between $40,000 and $70,000 a year. Larger families earning more than this can also benefit,” says www.ird.govt.nz.

Those breaks won’t help your Family B, because their income is are too high. Should high-income families be included, with everyone else paying higher taxes to fund that?

It’s great when a parent stays home to look after young children. It’s also great when someone works less to look after a sick or elderly family member. Or doesn’t earn money but instead puts time into charity work. Society as a whole benefits at least as much from the latter two activities, but we don’t give those families tax breaks.

Family B has chosen to have children with Mrs B staying at home. That’s nice, but if I’m going to pay higher taxes, there are other places I would rather direct that money.

Footnote: Because of an editing problem last week, part of a reader’s letter was presented as my response to the reader. Fortunately, I didn’t disagree with anything he said. But apologies to him, and to those who found last week’s second Q&A confusing.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.