For the first time this year, your KiwiSaver statement will let you know how much money you can expect to have in retirement. Gillian Boyes from the FMA gives a glimpse into what that might look like, and how contributing just a few per cent more from your salary each week can make all the difference.
If you were to receive a letter from your future 65-year-old self, what do you think it might say? “You’ve got grandkids now! You should see what technology can do! And I finally got that bach you always dreamed of.”
Or maybe it would say: “Thanks for making those adjustments to your KiwiSaver in 2020. They made a huge difference and I’m set for retirement.”
This year, nearly three million KiwiSaver investors will get a glimpse of the lump sum their 65-year-old selves might have. For the first time, your annual KiwiSaver statement will include a projection of your balance when you hit 65 and how much this amounts to as a weekly income on top of NZ Super.
These projections will give you an idea of whether you’re on track to reach your retirement savings goals. For some, it’ll be a pleasant surprise, while others will be thinking they need to make some changes.
If you’re in the latter camp, you’ve got four main options: make more one-off deposits, change your fund type, switch your provider, or increase your rate of contributions.
How important are contributions?
For most people, increasing their contributions can make the biggest overall difference to their end balance. Contributing just 1-2% more of your salary might involve getting just a few dollars less a week, but it all adds up to tens of thousands dollars when you retire.
Although most KiwiSaver balances will have taken a hit due to Covid-19, history shows that a steady contribution to investing in financial markets will grow your money substantially over the long term. This is all due to the magic of compounding returns – your investment snowballs because you earn interest on your interest and overall investment.
Let’s look at an example: Shannon is a 23-year-old teacher who earns $52,000 a year. She’s in a growth KiwiSaver fund with a balance of $6,500 and contributes 3% of her salary which is matched by her employer. On that basis, Shannon would have over $300,000 by the time she’s 65, or around $319 a week assuming she lives to 90.
If Shannon nudged up her contribution rate by just 1% (an extra $10 per week) she’d have an additional $48,000 for her retirement. If she increased her contribution rate by 3% she’d have $145,000 more.
You can change and find out your contribution rate via your employer. If you’re self-employed, you can make the same kind of changes by talking directly to your KiwiSaver provider.
How much will I need?
Before you change your contribution rate, try to estimate how much you’ll need for retirement. Some of us will want a flexible retirement with the option for holidays, restaurant dinners and other treats, while others will want a more modest retirement. As a starting point, Massey University research last year found a one-person household living in a provincial area with a “no frills” budget would need $574 per week, while someone living in the metro area on a “choices” budget would need $1,190 per week. However, this is just a guide – it’s up to you to decide how you want to live.
What happens if I stop contributing?
Covid-19 means some New Zealanders won’t be able to increase their KiwiSaver contributions because their income has been cut. In fact, some will even be considering suspending their contributions altogether for some time.
However, it’s important to note that KiwiSaver is designed to deliver value over time through the drip-feeding of contributions regularly into the fund. And if you stop contributing to your KiwiSaver fund, your employer will stop contributing too.
Take Shannon for example: if she wanted to suspend her KiwiSaver contributions for a year, her retirement balance would reduce by a few thousand dollars. While that might not sound that scary, it’s all too easy for that suspension to roll over every year which means you continue to lose out on long term earnings. So if you do need to stop contributing for a while, just make sure you remember to start contributing again as soon as you’re able to.
Remember, KiwiSaver savings are locked in until you’re 65 so you should think about your KiwiSaver as part of your overall household budget and what you can afford to contribute. But contributing even a small amount more to your KiwiSaver could help ensure you have a much more secure future down the line. Your future self might even send a postcard saying “thanks”.
Table assumptions: Calculations are based on the government’s retirement projection assumptions. Retirement age of 65; life expectancy of 90; employer contribution of 3%; inflation of 2% p.a.; all monetary amounts in today’s dollars and rounded to the nearest thousand. Calculation date June 11, 2020.