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KiwiSaver: Are You On Track To A Fully Funded Retirement?
What is KiwiSaver?
KiwiSaver is a voluntary, work-based retirement savings scheme. It is managed and invested by independent KiwiSaver providers, e.g. fund managers. All NZ citizens and permanent residents living or normally living in New Zealand are able to apply for its membership. This savings scheme is independent to the New Zealand Superannuation.
What is a fully funded retirement?
When you retire at or after 65 years old, you are able to enjoy the 100% lifestyle you enjoy today with support of funds 100% from your KiwiSaver savings.
Where to start to get on the track?
1. Choose a fund manager that is to your expectation. A fund manager should be able to bring you with above average returns, especially over a long term. A fund manager can be also a responsible investor, who focuses on environmental and social impact of investment.
2. Start early. The earlier you start, the more time you have to give your investments the potential to grow. Also, the earlier you start to save, the lower savings rate you need to have. If you start to save later in life, you may need to contribute at a higher rate, for example a total savings rate of 10% or 12%, in order to remain on track.
3. Start saving (contribution) at the right rate. Studies show on average Kiwis need to save 9% of what they earn while they work, in order to enjoy a fully funded retirement of around 20 years, (this saving rate for Australian is 12%, UK is 8%, ). For KiwiSaver members who are in employment are already getting a savings rate of 6% (employee 3% plus employer 3%). Another 3% personal saving in either KiwSaver or Managed Funds is still needed.
4. More growth assets and less income assets. All the contributions (savings) that go into your KiwiSaver will on average make up less than a third of your retirement balance. The remaining two-third of funds will need to come from investment gains. Income assets provide low returns over time (around 4.27% p.a.) and are taxed at up to 28% – which further reduces your return. In comparison, growth assets provide higher returns, if held over long periods of time, (around 10.61% p.a.) and attract little or no tax.
5. Long term investment for decades not for years. The longer you invest, the more reliable a capital gain is. KiwiSaver is designed as long-term investment, e.g. in decades of time. Your investment will still grow even after retirement if you continue to keep it. In New Zealand, the average retirement years are 25 years. The time span to retirement plus 25 years might be the time to invest your KiwiSaver.
6. Get advice from a professional adviser. Normally it is free to get adviser advice. The fund managers will pay commission to advisers, not by members. Studies show that by working with a financial adviser, you are much more likely to achieve a fully funded retirement, even after any additional costs for advice are taken into account.
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Patrick Wang
