Bernard Hickey argues it's time to think about how a million retiring KiwiSavers could either blow or sensibly use their NZ$100,000 pots when they retire

Bernard Hickey argues it's time to think about how a million retiring KiwiSavers could either blow or sensibly use their NZ$100,000 pots when they retire

By Bernard Hickey

So far all the noise in the debate about superannuation has been about the need to save more and plan for increasingly long retirements, or at least long lives after the age of 65.

That was certainly the focus in the debate about the cancellation of the KiwiSaver kickstart in the Budget and the ongoing contribution freeze for the New Zealand Superannuation Fund.

The age of eligibility for a universal New Zealand Superannuation and its indexation to average wages remains a topic of debate among policy types, if not politicians or voters. Non voters don't count.

But there's another issue that's rapidly creeping up on KiwiSavers and the Government alike.

What should be done with these KiwiSaver pots once they're free to be dipped into after the age of 65?

All the talk has been about the speculation and accumulation stage, and very little about the decumulation stage.

It's already a live issue issue for thousands of over 65s.

Even though KiwiSaver is only in its eighth year and the baby boomers have only just started retiring, the numbers pulling their funds out is rising quickly.

IRD figures show 65,336 KiwiSavers had withdrawn their money by the end of May, almost double the number at June 2013, which was the first year that retirees could realistically withdraw given the initial five year moratorium on withdrawals.

Over a million New Zealanders will turn 65 over the next twenty years and they are expected to live for at least 20 years.

Those KiwiSavers in their 20s now can expect to live nearer 30 years after they retire. The amount of money they could in theory withdraw on their 65th birthday will be significant. There is already over NZ$28 billion in over 2.5 million KiwiSaver accounts and the New Zealand Society of Actuaries has estimated that over half of KiwiSavers will have over NZ$100,000 they could withdraw in 25 years in today's money.

So what are retirees doing now with their pots of gold?

The short answer is we don't know for sure, but some early surveys as the retirements started in 2013 and 2014 showed just over a third had withdrawn all their money as soon as they could.

An IRD survey of 1,000 over 65 KiwiSavers in March 2013 found just over half left their money in.

An AMP survey of 1,000 retirees in 2014 found 15% planned to use their pots to pay off their mortgages, while 14% planned to invest it elsewhere, 14% planned to spend it immediately and 8% planned to leave their money in.

This raises some obvious risks.

Could poorly advised retirees, or those not advised at all, either blow their money or put it into the wrong places, destroying the whole point of KiwiSaver? Could some of the money be withdrawn and then leveraged up into rental properties, further inflating house prices?

Most of the funds are now managed by banks, who make most of their money by lending against property.

The early indications are that a retiring wave of baby-boomers are looking to take advantage of low interest rates and the prospects of capital gains to buy rental properties that could provide a better return than a bank account.

The New Zealand Society of Actuaries has addressed these issues in an options paper, which looks ahead at the risks, particularly given annuities which would use these pots to provide a guaranteed income for life are not available in New Zealand and are unlikely to become available, given the small size of our market, the risk many retirees will live for an awfully long time and that interest rates are so low. It points in particular to the lack of readily available and inexpensive independent financial advice.

The demise of finance companies decimated the financial advice community and the issue of commissions remains unresolved, although an official review is looking at the issue.

The danger is financial advisers or the banks for are incentivised by commissions to mis-sell expensive savings vehicles to retiring KiwiSavers who may never have had to think about how to deal with a pot of money before.

One option suggested by the Actuaries' Society is that if the Government looks at creating a state-sponsored annuity, that it does it quickly to avoid stifling the creation of a commercial market.

There is no burning platform to leap from. New Zealand's universal pension and simple and relatively cheap KiwiSaver savings system is widely admired around the world.

Relatively high home ownership rates among those nearing retirement now means most nearing retirement in the next decade are in reasonably good shape, although they do need safe and simple financial advice.

But beyond that, the risk is that the younger KiwiSavers of 2015 arrive at 65 in 20 years time to find themselves without a home, without enough savings and without the right advice to use the pot they do have.


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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If people were forced to place their KiwiSaver funds into an Annuity at 65 then less people may want to sign up to KS, or may start taking more extended 'holidays'.
Cash may be needed at 65 or 'retirement age' to wipe out any mortgages or debts.

Annuity's also tend to pay poorly. Ppl should be allowed to control their own capital.

Annuity's are only good if you live longer than expected. Making a sick person buy an annuity when they retire is just cruel as they may only live a short time and effectively lose their savings. There may be a market for kiwi saver providers to offer a plan that pay a regular income of the members savings. The bonus here would be that your money is still your money.

with Auckland property hyperinflating at >15% pa I see kiwisaver as nothing more than forced wealth confiscation. I put mine on hold.

75/15 = a doubling in prices every 5 years.

However at 8 to 1 P/E we are already approaching the "magic" 9 to 1 limit that seems very difficult to cross without it being considered seriously over-valued and a big risk. So can this 15% continue? if so how long for? Is it really possible Auckland can be unique in the world and prices can double in the next 5 years? No "common" place/city in the world has a 16 to 1 ratio.

Kiwisaver is really supported by property so if property pops its hard to see why kiwisaver accounts will also not lose shed fulls of $s.

How are you defining those p/e ratios? Say a 750K unit has a rent of 500p/w. That's a gross income of 26K per year and net of lets say 22K under ideal conditions. Wouldn't the p/e ratio be ~29:1 gross and 34:1 net?

Person I know started in 2007. 8% all the way thru with Carmel Fisher. Salary 75K for 5 years and now 48K. Balance now 85K. Think how that would be if she had started in 1980 at age 20

In that time I paid off the farm mortgage. $160k. I am not dependent on a squid rigged stock market looking shakier by the day. Thank god the government still allows people to make their own retirement decisions.

$160k is a two bedroom house (without garage).
72 acre was going to need a $2M mortage this year and that's not even what the Chinese or Movie Stars will pay.

Not seeing a lot of steady year-on growth in the sock market these days.

Lol Belle. In that same time she started with a 350K mortgage (with partner) and ended with nil mortgage. And spent $350K about 09 on an extra house (still ending debt free tho). As well as still ending up with a Kiwisaver balance in the 80s.
Most of the common taters here who decry Kiwisaver are not using the cash to invest alternatively. IMHO they just want to spend it.

Lucky shes got a partner KH. For your figures to add up the partner had to contribute. A lot. I ks no saving for many. But we need to have choice. I personally have a much better business for having reduced debt.

Exactly Belle. Point being that rich or poor just do the 8%, or 4%, and let it run. One day you look around and wow. You got the farm I think. Very good. Try a little kiwisaver ticking away on the side. Diversify.

Started in 2009 because I forgot to opt out (didn't want it initially), massively in debt. Remembered about it a year later, decided to stay since balance was around 10k, started working my way out of debt.

Now worth around 60k, at minimum contribution each year. Don't expect to maintain 30% returns, but KS was the spur for me to get my affairs in order, a result of which we've been able to buy a property with 35% equity and a manageable mortgage, even in today's Auckland.

Still have 30 years to put money into it...

Hey Bernard, lookee here, golly gosh, another non-baby-boomer

Reading between the lines Bernard wants compulsory annuity. OK Bernard. Please get one yourself.
Whenever this issue is raised, people almost always omit to mention that the Kiwisaver providers allow for a gradual withdrawl of funds over time which in my view is very similar to an annuity. Sure, the payout is affected by the markets over that period, but that is no different to the prior period where the balance is affected by the market too. And when the payout occurs, it is like dollar cost averaging in reverse where if there is a downturn, there is still some time for an upturn before the last payment is made.
I don't see a need for annuities at all. If people want to use it for a holiday, whats wrong with that? that's a very nice thing to look forward to upon retirement.

In an uncertain World, many of us know what the real risk is.
(2013) "While the world was glued to the developments in the Mediterranean in the past week, Poland took a step in order to not let a crisis go to waste and, announced quietly that it would transfer to the State - i.e. confiscate - the bulk of assets owned by the country's private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva), without offering any compensation. In effect, the state just nationalized the private sector pension fund assets, although it had a more politically correct name for it: pension overhaul."

Bernard, Kiwisaver will just follow Barnum's Rule for finance.

Barnums rule for finance for those who don't know it:
(1) Take their money
(2) don't give it back.
the end.

Bernard says:- it's time to think about retirement and KiwiSavers

OK - how about this

All migrants, on application for permanent residency, should be required to open a KiwiSaver account and deposit an amount proportionate to their age on arrival. (Scale between 20-65). Using $100,000 as a target amount, a migrant aged 42 would be required to deposit $50,000. Minimum opening amount of $10,000.

Of course, that's just an absolute minimum. Make it more. Do the same for foreign property investors

Yep. Immigrants should self fund.

Annuity ? I will just stay with the same provider who now has my kiwisaver. (Acknowledging at times it might be prudent to get another -or two others).
Twenty good years is the plan 65-85. Yeah yeah - might not go that way - but you need a plan.
Will withdraw 10% each year. Investment return will vary hugely which determines how long the lump lasts. Every four or five years can review the 10% and adjust up or down. Aim is to use it all by 85.
After 85 national super seems to provide enough for the quiet life of the old.
Naturally Kiwisaver is new and can't do it all just yet. It would need to have a one miliion balance to provide for me by itself from 65. So those not in it for forty years will need other assets.

yes, why not just make the KS dividend available to consume or reinvest, with option for partial withdrawl based on current unit prices.

the div it basically all the annuity is anyway. And on death pass what remains into estate Trust for The Family, which they can then leave via transfer to existing will beneficairies KS, or cash out and split or hold privately.

also consider looking at ways of reducing your future needs. energy is an obvious one.

I don't understand how the rapid creation of a state-sponsored annuity could possibly have any other effect than to stifle the creation of a commercial market.