The effects of the gender pay gap don’t only last throughout a woman’s working life – they carry on into her retirement. But there are ways to soften the blow to your KiwiSaver, writes Merewyn Groom.
If my recent article Super screwed: How the pay gap wrecks women’s retirements was all a bit depressing, for many women it was also a wake-up call. So I teamed up with registered financial adviser Jil O’Brien to share some ideas about steps women — and for that matter men — can take toward a more secure retirement.
In her job, O’Brien often meets women who stick their heads in the sand when it comes to planning for their financial futures.
We have a retirement savings system that hugely disadvantages women both due to pay disparity and because 80% of unpaid work in New Zealand is carried out by women (raising a family, caring for elderly relatives, including the in-laws, voluntary work, etc). In a system where a percentage of income is saved for eventual retirement, what results is women have much less money when that time comes.
Think you’re okay because you’re a bloke? Pay inequality for women flows through to a reduced family income overall. The same set of issues apply to anyone who takes time out of the workforce, and stay-at-home dads are increasingly common. Plenty of men get sick, or are made redundant and then cannot find work at a similar level of pay. We’ve seen lots of this since the deregulation in the 80s and there is likely to be another wave as industries in New Zealand change and automation increases.
The KiwiSaver system is an important tool with a range of benefits for many New Zealanders to plan for their retirement, but it’s not perfect. For example, many stay-at-home parents will not qualify for a first home grant due to not meeting minimum contribution levels. Surely young families are among those who most need this grant?
What can we do?
We need some policy changes, but before that can happen we as a society need to quit wasting time and oxygen denying the pay gap exists, and instead focus on some solutions. Until there are major improvements, look closely at your KiwiSaver fund.
Here are some ideas to consider:
Have a goal
The free calculators in Sorted.co.nz give you an idea of how much you are going to need and what you need to be contributing to get there.
Think carefully about your contribution rate
The minimum is 3% and your employer must also contribute another 3% if you are between 18 and 65 years old. Some employers offer to match a higher contribution rate, so it pays to check you aren’t missing out. Retirement may seem like a long way off but money put in early has more time to accumulate interest and this compounding interest can have a big effect on how much you finish up with. If you consider going for the highest contribution rate you can afford right now, you can reduce it to 3% later on if you need to.
Yes it’s boring and numbers can be confusing but you need to keep an eye on returns, and make sure you are getting a good deal. Make an active choice about your KiwiSaver. If you don’t, your contributions will be invested in a default investment fund. Think about your investment goals (including the length of time until you plan on withdrawing your KiwiSaver funds) and your attitude to risk, and choose a fund that will help you meet your objectives. This tool can help you.
Switching funds is very easy and there are many different products and providers to suit your priorities.
Consider fees and returns
While fees can significantly reduce your returns, the Financial Markets Authority says investors’ focus should be on both fees and returns – it’s even created a KiwiSaver Fee Tracker Tool to help you do just that!
Check your PIR tax rate is correct
Your KiwiSaver investment returns are taxed according to your Prescribed Investor Rate (PIR). This is based on your annual taxable income. It’s important you get this rate right — if you pay more than you need to, the money won’t be refunded.
Make sure you’re getting your Member Tax Credit
The government will contribute 50c for every dollar you put in up to a maximum of $521.43. That’s over $500 of free money into your retirement fund each year. To get the full amount, you need to contribute at least $1042.86 per year, that’s just over $20 per week. If you’re earning $35,000 and contributing 3% then that will cover it.
Susan St John, director of the Retirement Policy and Research Centre, says that women continuing to contribute to KiwiSaver while out of the workforce is one way to help close the gap. “If they can continue to contribute in one way or another — either by earning part-time or through the household — then it is the best investment you can make.” For couples with one high earner, it might make sense to work out whether it is viable to reduce that partner’s contributions in order to make voluntary contributions to the other partner’s KiwiSaver. If each partner contributes the minimum of $1042 per year, you’ll collect the full member tax credit for both KiwiSaver accounts.
Don’t rely on a partner’s savings
Maintain greater autonomy by fully discussing the financial implications of taking time out of paid employment, be it for children, an extended holiday or any other reason. Realise that the time out has a long-term effect – it’s not only reduced income for the period you are out of the workforce. The key point behind these suggested conversations is to consider your own needs as equal to those of your partner and family. Women can often view their personal needs as less important, which can come at a financial cost.
Here are some ideas you could discuss to help bridge the gap:
Treat childcare as a joint expense between partners (often it is assumed it is the mother’s expense) and consider how that could look for your family. Would the main income earner reducing hours to share childcare help? This could allow you to return to work full-time or complete further training to improve your career prospects.
Agree to a higher rate of contributions for the stay-at-home parent once they return to the workforce to help make up for the time without earnings.
Pay a wage to the stay-at-home parent. Giving an economic value (even a small one) to the roles of raising children and running a home offers the ability to maintain autonomy over retirement savings. Of course, you need to have the financial means to do this but viewing the role as requiring a wage can shift priorities enough to make it happen.
For more information on how KiwiSaver works take a look at the KiwiSaver website.
Changes to the system will come slowly but we can all start looking after our own financial lives today. Here’s to a comfortable retirement.
Merewyn Groom is completing a Bachelor of Commerce at Victoria University of Wellington and is author of Super screwed: How the pay gap wrecks women’s retirements.
Jil O’Brien is a Registered Financial Adviser and director of Coast Advisers. She offers free KiwiSaver Information Sessions and advice on personal and business insurance. A copy of her disclosure statement is available here. Any info in this article is provided for general information purposes only, does not take into account any person’s particular financial situation or goals and, accordingly, doesn’t constitute personalised financial advice under the Financial Advisers Act 2008. We recommend investors seek advice from their usual adviser before taking any action.
This section is made possible by Simplicity, New Zealand’s fastest growing KiwiSaver scheme. As a nonprofit, Simplicity only charges members what it costs to invest their money. It already has more than 12,500 plus members who, together, are saving more than $3.8 million annually in fees. This year, New Zealanders will pay more than $525 million in KiwiSaver fees. Why pay more than you need to? It takes two minutes to switch. Grab your IRD # and driver’s licence. It really is that simple.