Bach, boat & BMW dream gone wrongPosted to Financial Capability on 06-04-2016
For many, it's the Great Kiwi Dream - the bach, boat and BMW. Trouble is, many New Zealanders are heading for retirement able to afford only a pup tent, dinghy and BDW (broken down wheels).
Why? Many are simply not saving enough in their KiwiSaver accounts or maximising them wisely.
Let's take a look at this hypothetical Kiwi. We'll call him Ken. He's setting up a KiwiSaver account.
Ken is 30. He earns $100,000 a year before tax. His average life expectancy is 87, according to Sorted's new KiwiSaver savings calculator.
At the moment, he is paying $400 a week in his mortgage (or he's one of the new breed of lifelong renters in Auckland's runaway property market, paying $400 a week rent) plus tax of $24,000 on his salary. That leaves him $55,200 (or $1062 a week).
If he joins KiwiSaver now and opts for the minimum 3 per cent contributions (matched by 3 per cent from his employer), by 65, he'll have an estimated $355,368 - or a weekly income of $399 a week until he is 87.
Add that to the current pension of $375 a week and Retirement Ken has total weekly income of $774 (or $40,196). That's a big drop from $55,200 - a gap of $289 a week (or $15,028). If he's still renting at retirement, he will struggle to make ends meet.
Either way, the bach, boat and BMW are looking a bit sick.
"People think, just because they are in KiwiSaver, their needs will be taken care of later in life," says David Boyle, general manager investor education for the Commission For Financial Capability (CFFC).
"The reality is, for most people, that will just not be true. There will likely be a gap between what is coming in from the pension and KiwiSaver and the cost of living in retirement. "That's where Sorted's retirement planner is so useful so people can check the lifestyle they are heading for."
"Many people actually spend more in retirement initially than during their working life," he says, "because they travel, see family, buy a boat - things they couldn't do or didn't do while they were working. There may be some small costs savings made but generally there will be a lot more people working later in life either because they want to or out of necessity."
But if Ken opts to save 4 per cent in his KiwiSaver account, he ends up with an estimated $422,285 in his account ($474 a week until he is 87 or $848 a week with the pension added). He is getting a little closer to that figure of $1062 a week.
If he saves at 8 per cent, he ends up with a lump sum of $688,911 or $773 per week until he is 87. That plus the pension equals $1148 a week, a little more than he was taking home as a full-time earner.
Now you're talking...
Boyle says contributions to KiwiSaver are low, globally speaking. Australians have to pay 9.5 per cent of their salary towards their superannuation. In Singapore, employee and employer contributions total over 30 per cent of savers' yearly salaries.
Few people, he says, realise how much impact regularly saving even a little more can have. For less than $100 a week (something Ken will usually not feel at all as it is taken out of his salary before it goes in the bank) - Ken could make an extra estimated $333,543.
The income from that might not buy him a bach, boat and BMW but, if he already has those things, it will allow him to keep them and maybe do a trade-in on the boat and BMW.
Boyle says there are other ways of maximising KiwiSaver. One in five New Zealanders are still in the default fund they started out in - a conservative fund. If apathetic savers do not pick a type of fund that suits their needs, they could end up with much less by just staying with the default. In Ken's case, because he has a long way to go before retirement, his would probably be a more balanced, growth or aggressive type of fund.
"The plain truth is 80 per cent of conservative funds go into cash, government and corporate bonds," Boyle says. "Everyone knows interest is very low right now - there's not much money to be made there - and only 20 per cent goes into property and shares."
Balanced, growth, and aggressive funds, while they have more risk attached, also have greater growth potential. Studies show, over the 30- or 40-year term of a retirement plan, such funds significantly out-perform conservative funds - to the extent a young person working his or her KiwiSaver account the right way could benefit by tens of thousands of dollars more.
"People are living longer than ever," says Boyle. "My own mum is 90 this year and she's still going strong. For many people 95 is not out of the question and in years to come getting to 100 will be even more common than it is now.
"But you have to be able to enjoy staying alive; you have to make sure your money stays alive with you."
Next: A train ride conversation about wills