If you’re congratulating yourself on your growing KiwiSaver account, and plan to retire on the money, think again.
“The contribution obligations from both employee and employer are still too low to provide anything meaningful for most Kiwis,” says Hepple, who works for fund manager Pie Funds.
“The average wage in New Zealand is $48,000 a year and this would mean with minimum contributions of 3 per cent from salary, additional employer and government contributions, it’s likely that only around $3,500 is building up in the fund each year.
“For a 40-year-old putting in this sum every year and allowing for annual pay increases, it could potentially be around $250,000 at the age of 65.
“Obviously, $250,000 in 25 years’ time will not have anywhere near the purchasing power of what it has today, due to inflation eroding its value.”
And Hepple says his calculations also assume you hadn’t already withdrawn the money for a first-home purchase, something many Kiwis do.
He also points out that more than a quarter of a million Kiwis are on contribution ‘holidays’ and probably not contributing anything to their KiwiSaver fund over that time, meaning they’ll be even worse off.
“I have experienced very few examples where KiwiSaver balances have been enough to cover much more than a few years of retirement,” he says.
“I even know several retirees who have simply used the money to repay the mortgage when they reached the age of 65, or for an extended overseas holiday, rather than using it for retirement living.”
He says a common misunderstanding many retirees have is that in retirement they can’t draw an income from their KiwiSaver savings.
“Often, I have seen retirees closing their KiwiSaver account as soon as they’re eligible (reaching 65 years of age or five years of membership after 65, whichever is sooner) and putting this money into a savings account so that they can take drawings.
“It’s not well known, but you can instead set up a regular monthly transfer from the KiwiSaver fund to your bank account to provide drawings.
“This will often mean that your money is working harder for you.”
He says there are still many misunderstandings around the scheme and how it works.
“Any New Zealand citizen who is living in New Zealand and below the age of 65 is eligible to join KiwiSaver, but strangely, despite the obvious financial benefits of getting $521.43 each year from the Government, and employer compulsory contributions of 3 per cent of their wage, many Kiwis have still chosen not to join KiwiSaver.
“The only examples that I’ve seen where it wasn’t beneficial to contribute to a KiwiSaver account were where families needed to borrow money because they didn’t earn enough to cover their expenses; or they were going to need the money for something in the short term that they couldn’t get from any other source.”
There also appears to be confusion around enrolment in KiwiSaver and who to invest with, he says.
Almost 800,000 KiwiSaver members haven’t made a conscious decision around who their KiwiSaver provider is.
They’re still with a default KiwiSaver provider or the one nominated by their employer.
He says this must mean that they’re happy, don’t care or, more worryingly, don’t know that they can change to a provider that better meets their needs.
First published 6 April, 2018
By Brenda Ward
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