Take action to avoid KiwiSaver disappointment at 65

Friday, 21 October 2016

Whatever you're saving for retirement, it's probably not enough.

You've signed up to KiwiSaver and 3 per cent of your pay is being whisked away every fortnight. Sometimes you might even read the emails you get from your provider, giving you an update on the markets and the fortunes of your own finances. Retirement savings sorted, right?

Unfortunately not.

While the 2.5 million people who have joined KiwiSaver has blown away all estimates of how popular the scheme might be, there are concerns that the vast majority of people are not contributing enough to give them the sort of 'chocolate box' retirement they imagine.

Alister van der Maas, managing director of Russell Investment in New Zealand, said most people pictured their retirement as a time of travel, free time and doing all the things they were not able to while they were employed. 'The reality is they won't have enough money to do that,' he said.

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He said research had shown that if people wanted their pre-retirement level of income to continue after they quit the workforce, they would have to start saving 20 per cent of their pre-tax pay from the minute they started their first job.

'If you are saving 3 per cent, 5 per cent, 8 per cent… it's not going to turn the dial,' he said. 'People need to save a lot, a lot more than they think, a lot more than they are. Whatever you're saving, it's probably not enough.'

So what can you do to get your KiwiSaver account working harder for you?

PICK THE RIGHT FUND

It's important that you are in the right type of fund for your circumstances. If you have a significant period of time before you retire, you should be able to take on some extra risk – because you have time to ride out the volatility. Melville Jessup Weaver (MJW) data shows KiwiSaver growth funds returned 12 per cent across the board each year over the past five years, compared to 6.8 per cent for conservative funds.

MJW actuary Ben Trollip said, over a longer time horizon, a difference of about 2 per cent per year might be expected, but would still add up to a significant difference.

If you're not sure what's right for you, talk to your provider. Many offer risk profiling tools that match investors with the type of investment they should hold. You could also consider a life stages fund that adjusts your risk profile automatically as you age.

CHECK IN REGULARLY

Don't set and forget your KiwiSaver account. Check your balance every few months and make sure you know what sort of lump sum target you are on track to achieve, and what income that might deliver when you finally dip into it. KiwiSaver fund managers are likely to have to give you this information in your annual statement soon, but in the meantime there are online calculators at websites such as Sorted that make it clear. Many providers also offer their own online tools to help.

INCREASE YOUR CONTRIBUTIONS

As soon as you can, increase the amount of money you contribute to your KiwiSaver account. Someone who is 25 and earning $50,000 could be expected to have a balance of more than $340,000 at retirement, if they contribute 3 per cent of their income over their working lives to a growth fund. But increase that to 8 per cent and they retire with just under $570,000. If you start contributing at this higher level early in life, it is easier to get used to than if you try to the make the change later, when your budget is more established.

MAKE LUMP SUM ONE-OFF CONTRIBUTIONS

If you get a bit of extra money, such as from an inheritance or other windfall, think about putting a chunk of it into your KiwiSaver account. This is easy to do via online banking. That same 25-year-old contributing 8 per cent of their income could bump up their savings to almost $611,000 by 65, just by adding one one-off payment of $10,000.

CHECK YOUR FEES

Do you know what your provider is charging you in fees? These can make a difference over the life of your investment. Providers will probably soon have to display their charges in dollar terms on their annual statements. Compare the returns you are getting, after fees, with what else is available in the market.

* Workplace Savings New Zealand is holding its annual conference on November 7, in Auckland. It will address consumer expectations, regulation, financial advice and advisers, and the state of the market. Stuff is the media partner for the event. Click here to register.