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A recent survey found two in five pre-retirees don’t feel prepared at all financially for retirement (Image: Tina Tiller)
A recent survey found two in five pre-retirees don’t feel prepared at all financially for retirement (Image: Tina Tiller)

MoneyJuly 4, 2022

A $400-a-week shortfall: Why people in their 40s are facing a retirement squeeze

Guest writer
A recent survey found two in five pre-retirees don’t feel prepared at all financially for retirement (Image: Tina Tiller)
A recent survey found two in five pre-retirees don’t feel prepared at all financially for retirement (Image: Tina Tiller)

Many of those in the middle of their earning years are set for a bleak retirement on KiwiSaver’s current trajectory, writes Ayesha Scott.

Cost of living is – and should be – on everyone’s mind. But how we are managing increasing costs could impact us well into retirement.

As cost-of-living pressures continue to increase with record inflation and rising interest rates for mortgages, increasing numbers of New Zealanders are withdrawing money from their KiwiSaver accounts to survive.

According to last September’s Financial Market Authority’s KiwiSaver Annual Report, financial hardship withdrawals were up 42.8% from 2020.

For New Zealanders struggling to survive in 2022, saving for retirement is likely far from their minds.

It is also these New Zealanders for whom safeguarding retirement savings is arguably the most important, as they are less likely to enter retirement owning their home.

Worrying about retirement

The Financial Services Council’s Money & You report gave insight into how many of us are worried about our retirement savings – namely, being able to afford one at all.

Around 64% of New Zealanders worry they won’t be able to afford retirement, while 70% think they’ll need to work past age 65.

So while withdrawals, fees and fund switching due to stockmarket volatility are important savings topics, there is one (admittedly unpleasant) question we all need to ask ourselves. Is our KiwiSaver balance building up fast enough to provide for our retirement?

For the average New Zealander, the short answer is no. We are not on track. That’s before we take into consideration the possibility of future financial shocks, like high inflation.

Just over two-thirds of New Zealanders worry that they will have to work well past retirement age (Photo: Getty Images)

The gap between retirement and reality

The average KiwiSaver balance is $29,022, as of December 31 2021.

This figure is relatively uninformative by itself.

The Retirement Commission (formerly the Commission for Financial Capability) asked actuaries Melville Jessup Weaver (MJW) to dig into the numbers and provide some context, namely to break down the figures by age and gender.

Unsurprisingly, there is a large gender disparity in KiwiSaver funds – another important topic that has received considerable media coverage since it was revealed.

But there is a more general and pressing concern: the limited savings of people in their 40s.

Why this age group? Put simply, these individuals face high household expenditure with kids at home and, if they’re homeowners, increasing interest rates on their mortgage repayments. If they’re paying rent, that’s likely to be going up as well.

This age group also has less time to benefit from KiwiSaver’s compounding returns before retirement and, despite NZ Super being seemingly guaranteed, retirement is far enough away for a little uncertainty to be prudent.

This group was also already in the workforce for KiwiSaver’s inaugural year, with our current 41-year-old aged 27 in 2007.

Calculating a clearer picture

To gain a better understanding of what is facing this cohort, we need to do two things: first, estimate their KiwiSaver balance at age 65 (using Sorted’s KiwiSaver Calculator) and, second, calculate if this will be enough for retirement.

The average KiwiSaver balance for a 40-something is $36,833 ($32,987 for women, $43,068 for men). Assuming the average wage (to be conservative, let’s use figures from 2017) and investment in a balanced fund, a 43-year-old with a current average balance of $33,331 is projected to have $151,820 by 65. For a 48-year-old with current average balance of $40,335 in a balanced fund, Sorted projects $121,350 by 65.

But is this enough?

The New Zealand Retirement Expenditure Guidelines 2021 are the basis of Sorted’s retirement calculator. Our retirement options are “metro” versus “regional” living, and “no-frills” versus “choices” expenditure.

Let’s assume our average Kiwis are city-slickers (“metro”) and hope for a comfortable standard of living with a few luxuries thrown in (a “choices” lifestyle). Those in regional areas and/or planning to live (very) frugally are likely to spend less in retirement.

This calculation does not factor in other income (such as savings outside KiwiSaver, or working past 65) or having a partner, and we’re (optimistically) living until 90 years old.

After the weekly (singles) NZ Super payment of $463 combined with KiwiSaver funds, our 43-year-old is projected to be $392 per week short of the $1,029 they’ll need per week in retirement. Our 48-year-old is projected to be $427 per week short.

Those considering a more frugal lifestyle ($726/week) are still short after NZ Super and KiwiSaver: $89/week for our 43-year-old and $124/week for those currently aged 48.

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Save now or work longer

Kiwis are right to think they are not on track to afford their retirement and that they may be working well past retirement age.

Depending on your personal circumstances, you may or may not be the average Kiwi. It doesn’t matter. We all need to cope with today’s cost-of-living pressures while making sure we’re saving enough for tomorrow. On average, what we are doing now isn’t enough.

It didn’t have to be this way.

While we can’t go back in time and introduce KiwiSaver in the early ’90s like Australia, raising the baseline savings rate from 3% would help. This is not a new idea, with the Commission for Financial Capability recommending a graduated increase in 2016.

Unlike our employee-employer contribution mix where New Zealand employers match their employees’ 3%, Australians also enjoy an employer-paid scheme (currently a 10% rate, by 2025 it’ll be 12%). The current average balance for a 40-something Australian is about $125,000.

But what you can do now is take stock of your own financial situation. Regardless of age, you should do the above calculations yourself. Then, do something about it.

Individuals can contribute to KiwiSaver at a higher rate of 4%, 6%, 8% or 10% and choose the best fund type for their circumstances to ensure that money is working for them. Your future retired self will thank you.

Ayesha Scott is a senior lecturer in finance at Auckland University of Technology

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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Keep going!
Bear market: not as cute as it sounds (Image: Tina Tiller)
Bear market: not as cute as it sounds (Image: Tina Tiller)

MoneyJune 15, 2022

Welcome to the bear market

Guest writer
Bear market: not as cute as it sounds (Image: Tina Tiller)
Bear market: not as cute as it sounds (Image: Tina Tiller)

The stock market meltdown has cranked up a notch, while crypto keeps crashing. Here’s what you need to know.

The S&P 500, a key measure of the American stock market, has been flirting with the idea of going into a bear market for weeks now, but on Tuesday (New Zealand time) it finally happened. In addition to the regular markets, the crypto markets are in free fall too, with the sell-off continuing and prices of the big two (Bitcoin and Ethereum) reaching lows we haven’t seen for 18 months.

A what now?

What is a bear market anyway? Essentially it’s when stock prices decline at least 20% from a recent peak. These are relatively rare and quite often they kick off a recession, which is a big scary word for saying the total size of the economy is getting smaller, rather than bigger. The  S&P peaked on January 3 (which is now the “starting point” of this bear market), and the continued drop comes as concerns mount over high inflation, the war in Ukraine, Covid, and the Federal Reserve System (the US central bank) attempting to rein in the US economy with rate hikes.

This may seem far away from New Zealand and our own stock market, but the rest of the global markets tend to follow the world’s biggest economy, which is reflected in the NZX 50 being down by almost 20% since the start of the year, nearing bear territory itself.

What about crypto?

On the crypto side of the (bit)coin, there are a few major catalysts for the recent crash, and they all feed off one another. The first is the continued fall of Bitcoin (BTC) and Ethereum (ETH), which has led to an increasing number of traders getting margin-called – ie being forced to sell off the assets they held as collateral for the loan and essentially being “liquidated”. The last of the big three reasons for the increasing market uncertainty is one of the leading crypto exchanges, Celsius, halting customer withdrawals. 

Bitcoin reached a high of $US68,000 in late 2021 and has steadily fallen since then, with the weekend’s drop of 15% pushing the mainstay of the crypto markets down to $US22,000. Ethereum matched Bitcoin’s drop, reaching a low just over the crunch point of $1,000 – any lower and reports say it would have triggered $400 million worth of forced margin sell-off. 

Why has this happened?

It’s difficult to pinpoint exactly why markets fall like this, but it’s safe to say the crash is compounded by market decline around the world in general. As stock prices go down and investors become fearful, risky assets like crypto are seen to be less desirable, and the price decreases. Investors see the price go down, they sell to de-risk their portfolio and the price drops even more. This vicious cycle is boosted with the forced sell-off of margin-called traders. 

Finally, this sell-off has forced one of the leading crypto exchanges, Celsius, to halt withdrawals. Facing apparent liquidity issues, the network – which has more than 1.7 million customers and reportedly over $US20 billion under its management – simply doesn’t have enough cash on hand to pay the increasing number of customers wanting to convert their crypto assets into cash. The fear index in the crypto markets is super high, and moves like this don’t inspire confidence for existing investors – what if their exchange is next? 

Wherever you look, markets are being pounded right now, and for many this is the first time experiencing a market downturn to this extent. If we zoom out, history shows that the US stock market has always recovered from declines in the past. If you put money in stocks, over 10 years you would have been down only 6% of the time. Crypto has had many bear markets in its brief lifetime as well, albeit with higher swings, but the industry is still young. In 10 years’ time we may just look back on this decline as we look back on 2008 – a financial crisis, but one we bounced back from.