For most New Zealanders, a 5% KiwiSaver contribution rate would help them reach an 'adequate' retirement income but there’s no one-size-fits-all, retirement expert says

When it comes to preparing for life after 65, a group focused on retirement says it’s important to approach this in relation to your working income.

On Wednesday, the Retirement Income Interest Group (RIIG) of the New Zealand Society of Actuaries released a report called Retirement saving: A framework for adequacy.

RIIG is calling for a single framework for consistent discussion of “retirement income adequacy”.

But the report has caveats which influences their modelling on things like contribution rates.

Due to people’s individual needs, preferences, and constraints, when it comes to spending and saving, “adequacy of retirement income” can’t be specifically defined, the group says.

But RIIG uses three areas to consider what’s “adequate”. These three areas are how much retirees currently spend, hypothetical spend and the replacement rate (income immediately after retirement divided by the income before retirement).

RIIG convenor Ian Perera says targeting post-retirement income in relation to a proportion of pre-retirement incomes made the most sense in terms of how people could look at what’s adequate to them.

For most New Zealanders, having a 5% KiwiSaver default matched contribution would help them reach an adequate retirement income but there’s no one-size-fits-all, Perera says.

In the report, the group found: “The default level of KiwiSaver contributions should be set so the median earner is likely to achieve our definition of adequacy with a modest buffer against adverse changes in the savings phase.”

“Some flex from the hypothetical full savings career should be allowed for but should not be so large that it causes over-saving.”

The group says "savings deficits caused by gaps in contributions, first home withdrawal or early retirement are significant but are likely to occur in many people’s lives".

“Policy changes leading to higher savings requirements are possible. There is inherent uncertainty of future investment returns. Additional contributions or working longer may make up deficits but cannot be relied on to achieve adequacy.”

Smoothing your spending ability

Perera says it’s about smoothing your spending ability throughout your life.

“Suppose you’re on a high income and you haven't saved anything, if you’re just relying on NZ Super - that’s going to be pretty tough. And almost the other way around, if you’re saving too much money, then you’re giving up a quality of life before retirement in the future.”

“It’s always about getting a balance but this idea of looking at it in terms of in relation to your income, I think was important," Perera says.

“You don’t really get a one-size-fits-all contribution rate if you’re trying to achieve this sort of income smoothing. And that’s really because NZ Super is a fixed amount.”

Currently NZ Super after tax is about:

• $1076.84 if you live alone or with a dependent child
• $994 if you live with someone who is either 18 or older or visiting and staying more than 13 weeks in any 26 week period
• $828.34 each if you and your partner meet the NZ Super criteria
• $828.34 if between you and your partner, only one of you meets the NZ Super criteria

(These numbers are with the M tax code and would change if you're on a different tax code such as S, SH, ST and SA).

NZ Super is paid fortnightly.

So if you’re on a lower income, Perera says NZ Super is going to make up a greater proportion of what you might need or expect to have post retirement than if you’re on a high income.

“So you can’t expect a single KiwiSaver contribution rate to work for everyone if they’re trying to achieve this income smoothing."

RIIG's report also found:

• 3% is still a suitable minimum contribution “as it is at about the right level for those who remain on the full-time minimum wage for their entire career”.
• The highest-income 10% of earners may find a higher than 5% matched contribution rate more suitable for their personal targets. “They are likely to be able to make additional voluntary contributions and seek personal advice. Default contribution rates should not be set by the preferences of this group.”
• Earlier rather than later is better for retirement income.

The group also found: “NZ Super is a significant part of retirement income adequacy even for higher earners with large draw down potential from their KiwiSaver.”

“Calls for policy reform should recognise the implications of reducing NZ Super across the population and over time.”

Replacement rate

RIIG describes this as income immediately after retirement divided by the income before retirement.

The report says: "In this model, income before retirement is salary. Income in retirement is NZ Super plus KiwiSaver drawdown. We use after tax income as that is what is available to spend."

In doing so, the group says it assesses that retirement income is adequate if it “implies a replacement rate of 80% to 100% after tax with income lasting to at least age 90”.

This guide range includes tax and accounts for things like “adverse trends from the current situation of retirees, such as more retirees renting”.

“It is generally agreed that lower earners need to be at the higher end of the range and higher-income households could be at the lower end, with very high earners even below it.”

Perera says the group suggested a range rather than an exact percentage because it’s personal but it was important for people to have access to this kind of information so they could take action pre-retirement.

This could mean being comfortable with knowing you may have a lower income during retirement or trying to boost their income before retiring, he says.

While RIIG suggests an 80% to 100% replacement rate, Perera says there could be an expectation that your spending is reduced through retirement.

The group looked at the pattern of spending in retirement and Perera says generally, there’s a decrease in spending over retirement.

“Immediately after retirement, when people are often maybe lucky enough to be in good health, they want to travel. They want to do lots of things. But as you age, your capability and maybe your desire to do things sometimes reduces.”

Targets

The group says in the report: “KiwiSaver members see their current KiwiSaver balance on their annual statement, with a projection or illustration of what balance that could grow to by age 65 and what income could be drawn down from that until 90.”

“The statements do not need to give context on the adequacy of these amounts.”

RIIG also suggests having targets for retirement income adequacy and these being shown on people’s individual statements for projected KiwiSaver outcomes.

They suggest having two targets: one that focuses on contribution rates at younger ages so people can see if they are saving the right amount and a target that looks at balances in dollars at older ages so people can see how much more money they may need for retirement.

Calls for change

Retirement and KiwiSaver have been in the spotlight recently with one managing director of a KiwiSaver scheme saying there was “almost no incentive for individuals to have money locked up until they’re 65”.

As well as this, a report by the Retirement Commission and digital accounting firm Hnry found self-employed New Zealanders (there’s more than 420,000 of them) are being left behind when it comes to KiwiSaver and retirement.

At the time, Retirement Commissioner Jane Wrightson said: “Sole traders face a very real risk of poverty in retirement unless there is a cross-party consensus and policies that help them save more.”

With an election next year, it’s also a hot political topic.

New Zealand First leader Winston Peters announced a proposal to make KiwiSaver compulsory and to increase employee and employer contributions to 10%. Peters said KiwiSavers and employers would receive tax cuts to cover the increases.

Last week, Finance Minister Nicola Willis said National will go into next year’s election with a superannuation and savings policy while Labour finance spokesperson Barbara Edmonds said KiwiSaver was unfinished business for her party.

‘Avoid the expectation that one-size-fits-all’

Perera says people should think about their retirement income needs in terms of what their current income needs are.

He encouraged people to speak to financial advisers if they could or to try and use tools to help them understand where they’re likely to end up, allowing for things like NZ Super.

Perera says people need to avoid the expectation that one-size-fits-all when it comes to KiwiSaver contributions and avoid thinking that whatever the standard contribution rate is, is all they have to do.

“I think you definitely should be reviewing what’s going on, given your life circumstances.”