How long will the money in your KiwiSaver last after you retire?

23 Jun 2022

It’s not nearly as long as you’d think!

It’s time to look at how to make the most of KiwiSaver for you and your kids.

Disclaimer:
This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. To the extent that any information or recommendations in this publication constitute financial advice, they do not take into account any person’s particular financial situation or goals. We strongly recommend readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Any client information and case studies contained in this publication have been shared with the express permission of the individual concerned. No person involved in this publication accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any advice, opinion, information, representation, or omission, whether negligent or otherwise, contained in this publication.

Have you started to think about what your retirement will be like? Are you thinking that, with superannuation and KiwiSaver, you can enjoy the peace and comfort of a long retirement? The truth is, the reality is enough to make people cry!

Recently, KiwiSaver’s digital advice platform BetterSaver looked at the retirement prospects of Kiwis who chose the balanced fund option in KiwiSaver. The results showed that a 35-year-old New Zealander earning the national average wage would only have enough retirement savings to last three years and seven months of their retired life, after taking inflation into account. To put it concretely: New Zealanders who are now 35 will have a KiwiSaver account balance of about NZ$468,000 at age 65 (the age at which they start receiving a pension and the retirement age for most New Zealanders), which is equivalent to about NZ$264,000 in today’s economy. 1

BetterSaver founder and chief executive Joe Taylor said: “Many Kiwis’ retirements will be fraught with hardship – and possibly even homelessness. It’s terrifying…”

Think about it: if you’re 68 and you’re forced to work for a living, that’s really scary!

Today, YG Financial Services will talk to you about when to open a KiwiSaver account and how to choose the right KiwiSaver fund type and provider if we want to achieve the goal of a comfortable retirement.

1. Open a KiwiSaver account as soon as possible

We all know that KiwiSaver is a retirement savings fund set up by the New Zealand government and that participation is voluntary. Service providers are responsible for managing and investing the funds. The aim of KiwiSaver was initially to help more New Zealanders improve the quality of their retired life, and this was later expanded to allow the funds to be used for other specific purposes, including purchasing a first home.

KiwiSaver is financed from three sources: personal deposits, government grants and employer contributions. One of its biggest benefits is the government grant of up to $521.43 per year for eligible accounts.

However, many people think that because KiwiSaver is contributed to by employers, that it is better to open it after entering the workforce. In fact, this is not the case. Children (referring to people under the age of 18) can also open a KiwiSaver account, and there are many benefits of doing so!

What are the benefits of opening a KiwiSaver account for your child as early as possible?

Benefit 1: The earlier you invest, the more you can enjoy the benefits of compound interest

Compound interest is often called “rolled-up” interest, which refers to the method of re-investing with the interest added on after a deposit or investment has been returned. Of course, interest will then be calculated based on the new investment amount (which is now higher). Generally speaking, the longer the investment time, the more obvious the benefits of compounding will be.

YG Financial Services will do the math for you (using the KiwiSaver calculator from sorted.org.nz):

Let’s say your child joins KiwiSaver at birth, and then contributes $30 a week into his account. With an aggressive fund investment plan, by age 65, the person will have a balance of $547,000.

Suppose you join from the age of 20, earning an annual salary of $50,000 and making weekly contributions to your account according to the minimum 3% income ratio, and also choose the aggressive fund type. By the age of 65, this person’s account balance would be $408,000.

If you join from the age of 30, with an annual salary of $50,000, contribute to your account every week at the minimum of 3% of your income, and also choose an aggressive fund type, then by the age of 65, your account balance would be $248,000.

It can be seen that the earlier you join, the greater the benefit. In reality, after the child in the first example starts a job, begins making their own contributions, and receives employer contributions and government subsidies, it will be a different picture again. When they reach retirement age, they will have much more savings than initially calculated, and be better prepared for retirement.

Benefit 2: A subsidy for the purchase of your first home

I believe everyone knows how high house prices are in New Zealand and how difficult it is to buy a house.

The KiwiSaver account can not only be used to withdraw money for the purchase of your first house, but it also makes you eligibile for a government grant. If you have contributed to KiwiSaver for more than 3 years, you can withdraw money to put towards purchasing your first house, leaving a base amount of $1000 in the account. In addition, holders of KiwiSaver accounts that have contributed continuously for more than 3 years can also apply for the government’s First Home Grant.4

Benefit 3: Lead by example – cultivate children’s concept of “financial management” from an early age

Financial management is a life skill that everyone should have. In this area, children are blank pieces of paper. Parents need to teach them the correct concept of money and effective financial management skills from a young age. Otherwise, when they grow up, make a living independently and face the economic pressures of life, they will not have the skills they need and will have to learn from scratch by themselves.

Of course, instead of constantly talking about money, it would be more effective to actually lead by example. One way of doing this is to open a KiwiSaver account for your child, discuss it regularly with them, and review the account together. And kids will discover that money they save now will pay them back later in life. They will have more of a concept of investment and return.

However, there are some things to be aware of for children opening a KiwiSaver account:

Number 1: Pay attention to the provider’s fees.

Some providers charge management fees. For a child’s KiwiSaver account, since the balance is inherently small, the management fee will greatly reduce the return on the investment.

For example, some providers charge a flat fee of $36 per year. If you fund your child’s KiwiSaver account with just $100 in the first year, about 36% of the account will be used to cover this fixed cost.6

At present, there are some KiwiSaver providers in the New Zealand market that offer reduced fees or no fees for children’s accounts. For details, please consult YG Financial Services’ licensed financial advisors.

Number 2: Government subsidies are limited to account holders aged 18-65

As mentioned earlier, the biggest benefit of KiwiSaver is that there is a government subsidy of up to a maximum of $521.43 per year, but this subsidy only applies to eligible accounts – those held by people aged 18-65.

Number 3: Once you join, you cannot quit at will.

Opening a child’s KiwiSaver account is free, but you cannot close it at will.3 Payments are voluntary for children, but there are some providers that have set a minimum contribution for everyone, including children7, so if the parents don’t have the long-term willingness to contribute to their child’s KiwiSaver account, this can become cumbersome. Contributions become compulsory once an account holder is in paid employment7 and, although there is an option to apply for a “savings break” under certain conditions, this would have to be renewed yearly.4 This is important to know before choosing to join KiwiSaver for your child.

2. Choose the type of KiwiSaver fund and provider that suits you

KiwiSaver currently has 30 providers and there are currently five fund types: defensive, conservative, balanced, growth and aggressive. Depending on the type of fund you choose, returns can vary widely over the space of decades.

Let’s take Generate, one of the KiwiSaver providers in the current market, as an example. Suppose someone is 20 years old, has an annual salary of $50,000, and contributes the minimum 3% of his income to his KiwiSaver account weekly. If you calculate what his account balance will be at aged 65 for each of the different fund types available, the results show a huge difference ranging from $180,000 to $430,000 (see Figure 5 below).2

Image source: www.generatewealth.co.nz

So, with so many providers and so many types of funds, how do we choose the right one for us? Please take a look at YG Financial Services’ latest video (see link below), in which senior insurance consultant Yang Gu explains what you need to understand in order to choose the right type of KiwiSaver fund for you!

Still wondering if your child should join KiwiSaver?

Not sure how to choose a fund type?

Still have questions about choosing a provider?

Come and chat with YG Financial Services!

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