Making Your Golden Years Shine; Will Your KiwiSaver Be Enough?20 July by
Making Your Golden Years Shine; Will Your KiwiSaver Be Enough?
As you may have noticed on your recent KiwiSaver annual statement, this year the statements must have a projection to give you some indication of how much you could have in your account at retirement.
First of all, we want to stress how fantastic it is to be thinking about your retirement finances. A bit of forethought now can make all the difference to your golden years. Will you have enough to enjoy a comfortable lifestyle? The long story short here is, there is no crystal ball, but if you want to have a bit more confidence about your financial future it pays dividends to take a closer look at your personal situation.
The figures on your KiwiSaver statement are not a guarantee, but instead are an estimated projection to help you make important decisions about your fund choice and how much you are contributing. But should you rely on those projections? We have some concerns about the assumptions that are underlying these projections and think you should consider them carefully, rather than relying too heavily on what your KiwiSaver statement says, this year especially.
Hopefully you have seen Mary Holm write about this topic or other business commentators. So why is this suddenly mainstream news? Because every one of us in KiwiSaver will now see a big (or not so big) number on our account statement – a prediction of how much will be in there come retirement age. This new feature, required for all KiwiSaver providers, means now an estimate must be shown for what could be 30+ years into the future. That’s a big ask in itself, as 2020 has clearly illustrated, nothing in this world is easily predicted.
The next prediction required by the fund managers is how long a retiree could draw from their KiwiSaver over the 25 years from age 65 to age 90. Whilst this may be referred to as a retirement income, it is in fact more a drawing. The calculation assumes you take the earnings and some capital each year until at age 90 its all gone. So, you need to make sure you expire before it does!
So What Are The Assumptions?
So what are the assumptions?The assumptions your KiwiSaver provider uses to calculate the projections are set by the Government and will be reviewed from time to time. Returns, national inflation, wage increases, income tax, contributions, fund management and spending. Their data includes;
- The providers must use set growth assumptions for each type of fund. Ranging from 1.5% for the funds with the least shares and property to 5.5% for the aggressive funds with the most. These returns are net of tax and fees.
- The projections are adjusted for inflation, to enable you to assess the buying power of your money at the time you would receive it. The inflation assumption is currently 2% per annum.
- Your pay will increase by 3.5% each year and your contributions will increase in line with your pay.
- After tax of 28%. This is the highest and most common tax rate for KiwiSaver members.
- If you make any one-off payments during the year, you’ll continue to do this every year until you reach 65 (capped at $1,500 in total per year).
- You stay in the same fund or fund mix until you are 65. After 65, your balance will earn a 2.5% rate of return each year (after fees and tax).
- For the weekly amount, you will make regular withdrawals over 25 years (ie until age 90) until your balance reaches zero.
These predictions may appear to give Kiwis a glimpse into their financial future, however, these assumptions aren’t sitting well with all financial advisers.
An Advisers' Perspective
So what is it about these predictions that have financial advisers talking? Retirement is the rest of your life, free from the chains of employment to do everything you always wanted, and to do it comfortably. Is it a fear of Kiwis under-saving that has set return rates so low as compensation? For example, they have assumed very low interest rates in the future, so a defensive fund returns only 1.5%. This is sensible only if you don’t also assume low inflation, but at 2% this is a pre-quantitative easing assumption and makes the ‘real’ return on defensive funds -0.5% or 0.5% for conservative investors. So, are we to assume investors will accept their money shrinking in real terms throughout their retirement?
The desire to be conservative though is not carried over to wage inflation. The calculation assumption of 3.5% annual wage inflation is set too high given New Zealand’s current average is 2.6%1. Given we are in a recession there is little confidence in this raising soon. Even if we do accept that number, is it realistic for a 55 year old to achieve a 3.5% increase in wages through to 65? Most of us are happy just to keep being paid over that time frame or are looking to slow down.
All Go, Go Slow, No Go
The Government’s spending prediction assumes that Kiwis will spend the same amount weekly from 65 to 90. The problem with this assumption is that it doesn’t take into account the three common stages of retirement – all go, go slow, no go. A 65 year old will often require a higher spend over a 90 year old, as the first stage is likely to be filled with travelling and experiencing the things that may have been missed or long planned. Whereas the 90s are generally less mobile years, mostly spent within the home. To budget savings out evenly throughout these years would be beyond realistic. Imagine reaching 90 and having all this money you could have used to live up your younger years. Or consider the opposite, many 90 year olds manage to live off superannuation quite comfortably, while others feel the need to budget on top of their super.
Taking The Shine Off The Golden Years
Another assumption, is the requirement for providers to assume that retirees go into a conservative portfolio at age 65, however with life expectancy of over 85 years2, that still leaves 20 years of possible investment timeframe. With a timeframe like that, given an individual’s circumstances, they may very well be better off in a more growth focused fund.
Many will find that relying on New Zealand superannuation alone will not be enough, and financial planning is required into those years for comfortable living. These projections assume that your KiwiSaver will run out at 90. Many retirees require more than superannuation can offer, while others can live off it quite comfortably. Others plan to leave a legacy, another intent missed in these predictions.
Retirees also don’t spend the same amount week in week out. Some spend more than 30% of their total annual expenditure on a single overseas trip. Often they get a big house maintenance cost like a new roof when they least expected it. If you haven’t allowed for this in your investment strategy and we see a market upset like COVID-19 caused, then you can be forced to sell investments at the worst time. Reversely, in the good times like the end of 2019, is the best time to take a bit extra out of your portfolio. Your fund manager isn’t there to help with those decisions and these simple projections don’t do anything to assist with that planning.
...there is no crystal ball that will tell us what the future brings. Using well-informed inputs, we can plan, measure, and manage along the way to keep you on track to reach your financial goals in life.
Financial planning is part art, part science. And Kiwis should rely less on generic KiwiSaver predictions and instead seek one-on-one assessments with experienced financial advisers. Advisers will look at events and the financial market for the past 100 plus years and apply that data to your financial situation as an individual. Advisers will suggest how to invest, what to invest in, and what strategy is best suited to have your KiwiSaver returns meet your needs. They will also write up a plan suitable for all stages of retirement, meaning that instead of having the same weekly spend from 65 to 90, they will plan for each stage based on your plans, personal values and goals. The Government predictions are one size fits all and set and forget, however in reality projections need customising and constant revision. An adviser will make themselves available to reassess your investments whenever needed, as well as providing confidence along the way when you’re ready to buy that boat or upgrade to the bigger home.
Principles Remain The Same
Whether you choose to get an individual assessment, or follow the Governments’ projections, the core principles to investing remain the same.
- Start with the end in mind – define your goals and fit your focus.
- Investing early is one of the most powerful things you can do to build wealth.
- Get advice from a professional to understand your personal situation.
All said and done, there is no crystal ball that will tell us what the future brings. Using well-informed inputs, we can plan, measure, and manage along the way to keep you on track to reach your financial goals in life. The better our assumptions though, the easier it is to make major financial decisions. If we believe in our assumptions, then we can only but live by the sum of them!
About the Author
Sam Walter is an Auckland based Financial Adviser who has been supporting clients with their insurances and investments for nearly 20 years. Sam has over $90 million worth of private funds under his management and is great at motivating people to improve their financial behaviours.