KiwiSaver no panacea to retirement savings deficiency but a good opportunity nonetheless

KiwiSaver no panacea to retirement savings deficiency but a good opportunity nonetheless

By Amanda Morrall

Despiriting as it may be turning 50, what's arguably more depressing is snapping out of a middle age funk to find yourself on the doorstep of retirement with insufficient funds to get over the threshold let alone see you through the twilight years.

Those who have mastered the art of living frugally (that is making do with a net income of less than $14,000 per year) may be comforted by the arm of New Zealand Superannuation extending its reach at 65. (For extact entitlements see Work and Income.)

Others who enjoy a higher standard of living and perhaps don't want to bank on the long-term survival of a savings pool set to be drained by a super-sized demographic bulge barrelling toward retirement might want to make alternative arrangements.

At the late stages of pre-retirement, KiwiSaver is not what you would call a panacea but it represent a savings opportunity nonetheless.

At least that is a commonly held view among those in the financial advisory sector including respected investment writer Martin Hawes who describes KiwiSaver as a  "bolt-on extra.''

With a limited window for savings, it won't likely pay for the retirement villa of  one's dreams but it could make the difference between a few visits to a daughter or son living abroad, he suggests.

As a KiwiSaver himself, Hawes believes it is "well worth taking advantage'' of primarily because of the subsidies.

Under the current rules, all New Zealanders under the age of 65 are eligible to enroll. Those shy of their 65th birthday can still receive the NZ$1,000 kick start and tax credits of NZ$1,042 a year.

Late stage KiwiSavings, while modest, are not insignificant.

For example, someone earning NZ$25,000 a year, making 4% monthly contributions (with a 3% annual salary increase) and employer contributions of 2%, could end up with between NZ$14,000 and NZ$18,000 depending on the rate of return. (To calculate your possible KiwiSaver earnings at age 65, download our account balance estimator here.)

Like Hawes, ANZ Wealth's General Manager of Funds Management David Boyle sees KiwiSaver as a supplementary savings tool for those in their '50s and '60s.

"It's a piece of the pie and a contributing factor to help people get an income and a top-up on the other investments they might have once they reach retirement.''

While an estimated 50% of the eligible population in that demographic have joined, Boyle said many were still missing out on the potential benefits. He believed the reluctance had to do with the belief that a contracted investment time frame would not make a material difference.

Fund performance among select KiwiSaver providers might suggest otherwise. Some of the better performing actively managed funds have produced more than 10% returns per annum since KiwiSaver started.

Irrespective of the returns it delivered, financial advisor Craig Myles, director of Myles Wealth Management, maintained that KiwiSaver was a good way to enhance savings. That's because of the added value of employer contributions, tax credits, a kick-start and the beauty of compounding interest.

"It's a different investment paradigm to the investment performance paradigm if everyone is putting money it in because you can still be ahead in dollar terms,'' said Myles.

Myles said an awakening among this demographic to mortality meant many were becoming more interested in preparing for retirement.

"Particularly at age 55, we find they start to get focussed on the figures; how much they have and how long that might last.''

Myles said one of the many benefits of seeking professional advice was getting models that could forecast the numbers more accurately.

"The earlier they get engaged in that advisory process, the easier it is for them to understand their choices. They start to realise that the decisions they make, about how much to spend and how much to save, can be quite crucial.''

As everyone's situation is unique, Hawes emphasised the individual nature of investing. He admitted to being in an aggressive KiwiSaver fund himself but said it was not what he would advise a 58-year-old who didn't have other retirement savings and assets to fall back.

While rates of return, over long periods of time (usually 10 years and beyond) can make a big difference to the bottom line, Hawes placed greater emphasis on level of savings over variable rates of return. He said a 2% plus 2% savings policy (as has been adopted with KiwiSaver) fell far below what other countries, like the United States were now advocating.

Annual savings in the order of 12 to 15% of income have become the new norm, he said.

"The amount you save is more important than the way you invest,'' emphasised Hawes.

"The amount of surplus you can put aside, and that clearly brings in the length of time as well, will make a bigger difference than over whether you get 2 or 4 or 6% return on your money.'' (To read more about "safe savings rates" read this blog by Wade Pfau,  Associate Professor of Economics at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan.)

Generally speaking, he said those between 50-55 could therefore reasonably expect to withstand higher volatility in the type of fund they were invested in having higher growth exposure in a conservative or balanced fund. After age 55, Hawes (like many others in the financial advisory sector) advocates scaling back exposure to risk assets, that is equities and property. A conservative fund would therefore be more appropriate, he said.

Although 50 to 60 years old were advantaged in the sense that they were most likely at their highest income earning years at the late stages of working life, they were limited by the period with would they could invest in KiwiSaver. Hawes said that drove home the importance of starting one's retirement savings early and also KiwiSaver being just a piece of a much larger financial puzzle.

One's goals, desired quality of life, personal and professional circumstances all needed to factor into an overarching financial plan.

At age 50 Hawes reduced his future to '20 good summers.'

As an avid outdoorsman and passionate climber, he reasoned that by age 70 the gig would be up...at least he speculated that his breathtaking views of the Southern Alps would be greatly diminished.

Accordingly, he mapped out a plan that would allow him to make the most of his money - and time - so that he might conquer the mountains of his dreams while he was physically able to do so without breaking any bones - or the bank.

Striking this balance may be easier said than done with low-risk age appropriate investment returns at odds with longer life expectancy projections.

In his book, "Investing for Twenty Good Summers,'' Hawes frames the condunundrum as such:

"We are staring into the face of the end of full-time work and starting to think about how we will have to rearrange our money. We know that we will have to become reliant on investment returns for least some of our income and some of us are not sure how that will work.''

By choice or necessity, many are opting to work beyond the age of 65.

That being the case,  KiwiSaver could outlive its usefulness, at least to the extent that it provides those added benefits for late-comers.

According to the KiwiSaver Act, employers are no longer obliged to continue making contributions to an employee's KiwiSaver scheme once they reach the age of 65 and if they've been in the scheme for more than five years. The same goes for Government member tax credits. Anyone over the age of 65 who has been a member of a KiwiSaver scheme for more than five years is no longer entitled.

KiwiSaver's inevitable maturation date has also raised questions about ease of access to those accumulated funds. The concern being that years of hard-earned savings be wiped out in the face of a lump-sum cheque the size of which most people are unaccustomed to dealing with.

Boyle allays those fear. He said KiwiSavers who wanted to protect and preserve their capital could keep their money in their account, draw down on it as necessary, continuing investing (without the benefit of employer contributions and tax credits) or transition the money into an alternative savings vehicle. At least that was the case with OnePath, fund manager for four ANZ schemes.  Rules on withdrawals varied among providers.

Boyle said knowing well in advance what the money was for was key to both saving and spending it in retirement.

"People need to have something to plan for. If they haven't done so at this age, they still have time to do it. Particularly those in their 50s or early 60s because they are going to be living for a long time after that. One of the key things is don't stop paying that money to yourself. And KiwiSaver is a great way to ensure that you do.''

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The trouble with calculators like these is that they give no guidance as to what are reasonable values for the parameters, nor do they help you decide where to put your money. The range of returns after taxes and fees is 1-8%, whereas the evidence suggests that 2% is a good return over a long enough run. Likewise the suggested annual real wage increase of 3% - how realistic is that? Any evidence?

When I graduated in 1985 people were getting starting salaries of $15-30K. Let's say $20K. After inflation that is $52K today. What salary might this new graduate have reached in 2011? The median is probably somewhere in the range $65-80K. That is a 0.9%-1.7% real increase per annum. 3% would take our graduate to a salary of $109K today - some 45 year olds would be earning this much but not many I suspect.

To save more you have to spend less. Was that spending really completely worthless to you so that you shouldn't count its loss as a real loss? 

Fair enough Robert....it's hard to gauge. If you're a CEO, regular salary increases look good, further down the food chain, not so hot. When I looked at that issue back in 2010, this is what I found:

The unadjusted Labour Cost Index (which factors in performance- related pay increases) shows annual wage growth of 2.5 per cent for the year ending March 2010. That's the smallest annual increase since the index began in 1995 and is down from 2.9 per cent in December 2009.

http://www.stuff.co.nz/business/money/3836515/How-much-are-you-worth-as-...

I guess if you deem a flat-screen TV a real enrichment to your life, that spending wasn't a total lost. I don't want to know how much money I've spent on lattes over the years but I've enjoyed them, largely at the expense retirement savings I suppose. Small pleasures must surely count for something.

 

"To save more you have to spend less. Was that spending really completely worthless to you so that you shouldn't count its loss as a real loss?"

Of course the only person who can really make the judgement as to whether spending now is worth more to you than saving now so that you can spend later, is yourself. 

HOWEVER. The trouble for policymakers is that so many people get that wrong, or change their minds later, when it's too late - "I now wish I had saved that money, instead of spending it on fripperies that I now realise were worthless" - and human nature being what it is, the Government is blamed - "I couldn't help myself, they should have stopped me" - and the public purse is left to pick up the pieces -"what sort of a society are we, leaving this poor little old lady to poverty".

 

If Government intervenes to prevent such outcomes, a different risk arises: that other people, who would otherwise have managed OK by themselves, will be guided down a path which is not ideal for them - eg, the example of somebody who'd do better to pay off their mortgage first.

Given that the Government can't be expected to make sure that each and every individual who cannot or will not make the effort for themselves, is provided with a default option which is precisely tailored to their individual circumstances, it becomes a question of the lesser of the two evils.

Personally I think the Government has jumped the right way in making sure there is an easy option available, although I'd rather the taxpayer wasn't paying quite so much to reward people for doing what's likely to be intheir own best interests anyway. At least it's not compulsory, as it is in Australia, so that the switched-on individual is not forced into something that they know they don't want.

 

Personally I think the Government has jumped the right way in making sure there is an easy option available, although I'd rather the taxpayer wasn't paying quite so much to reward people for doing what's likely to be intheir own best interests anyway.

Perhaps you could take as some small consolation the fact National stopped contributing to the "Cullen fund", so just think of it as existing payments for purpose now diverting to a slightly different final destination.

Mmm - up to a point.  The difference is that payments by today's taxpayers to the NZ Super Fund  will later be used to pay NZ Super, thus (slightly) reducing the burden of NZS on tomorrow's taxpayers. 

Whereas at the moment, all the money that today's taxpayers are paying into other people's KiwiSaver accounts will be additional to NZ Super, so won't make any difference to the cost of NZS to tomorrow's taxpayers.  On the contrary, the money that Government is paying into individuals' KS accounts is borrowed money which therefore imposes a debt burden - on top of the burden of funding NZS - on tomorrow's taxpayers.

This is on the assumption that NZS will continue to be paid on the universal, non-means-tested basis that it is now, like the Prime Minister says. That's a nettle that it's difficult to see any politician grasping!

 

 

A graduate in IT would bye lucky to get 60k.....The median is probably under 50k.

A fabulous opportunity for those with no debt. Sadly that's not commonplace with the common man! There is simply no logic to Kiwisaver for anyone with a mortgage.

Even as a champion of the scheme, you must see that there are better ways to manage for the future than use Kiwisaver unless you are debt free or your employer provides contributions into the scheme. Sadly many employers are extracting themselves from such obligations. I suspect the Govt department employees are supported such (pardon my cynicism).

Better to negotiate better pay and reduce your debt. 

I would have thought that for the contributions up to the threshold, a 100% return on your investment via the employer matching would be much better than paying off your mortgage.

Am I missing something?

I find these posts much easier to read if I pretend its a poem being read by Sam Hunt

Ms De Meanour makes some excellent points. Kiwisaver is certainly better than nothing. It may slightly foster a culture of saving. But it is not going to be enough to relieve the government of the burden of the present super system. In 30 years, the Australian government will likely be paying nothing for super (as it is already means tested) and we will be in more or less the same situation as now.

As Hawes says in the original article, people who have a propensity to save should be thinking about saving 15% (at least) of their income and a small incentive from the government to do so wouldn't go amiss. It would be money well spent in the long run. If half of the mortgage-free population did that, and the super were means tested, we should end up about right. 

The next step is to see what the government adopts from the Savings Working Group. Given that the report seems to have generated hardly any public reaction I guess they are free to do what they like.