KiwiSaver - Fitting It In To An Over All Plan
There are over 2 million Kiwis in KiwiSaver and total investments in the billions with millions per day being added to member accounts. Member account balances are reaching sizable proportions with six figure sums commonplace. It would be fair to say this has exceeded everyone's expectations. But, how many KiwSaver members know what it will mean for their retirement lifestyles? Can they, or do they want to, go into retirement feeling that they will have enough to upgrade the car or visit the grand kids in Toronto?
According to a recent ANZ survey, surprisingly, less than a third of members knew their KiwiSaver balance. This indicates members are not aware if they are on track to meet their retirement goals. We tend to be very good at keeping track of the balance of our cheque, short term savings accounts and credit card limits; all of which are important to today. But, it would seem we are not so good at long term planning.
The Australian's have had a compulsory superannuation programme in place for over 20 years. Their experience has shown that members started taking notice of their account balances when they equated to the price of a new car - around $30,000. This triggered a desire to determine if the savings equated to their retirement aspirations. The upshot was an increase in financial and retirement planning services.
In New Zealand we are beginning to have the discussion around how to provide these advice services to KiwiSaver members. One of the issues is the huge number of KiwiSavers in default plans (employees are automatically enrolled when they start work and allocated to one of six pre-selected providers' conservative funds). This is further compounded by the fact that New Zealanders aren't particularly financially literate and there is a societal aversion to paying fees for advice. The challenge for the investment industry is provide advice services at affordable and acceptable fees.
We are currently seeing some cookie cutter presentations being dressed up as advice. These are invariably system generated reports that aren't much more than a matrix of numbers. Once you add a human element to any equation the scenarios become endless and the solutions unique. So, we recommend be wary of online retirement planning programmes. They have their place but it is important to understand the assumptions that are being made on your behalf and determine whether you agree with them.
For example, how do you treat inflation in the equation? Some programmes will increase contributions by 3% annually to allow for inflation. At this rate your contribution will have doubled in 24 years' time. This produces a significantly higher account balance on retirement but how does it equate to actual value (or purchasing power) at retirement. It goes without saying that if your contributions have doubled through inflation then your purchasing power must have halved. Big numbers can make it difficult to visualize how this will provide for your lifestyle in retirement. While calculators can also inflate costs in retirement we all have a much better feel for money in today's dollars. One option is to remove inflation from the future account balance calculation so it equates to today's value.
Inflation does still need to be taken into account when planning for the future. Increasing contributions either by salary or inflation increases will ensure you maintain the future purchasing power. With KiwiSaver, for the majority of folk, contributing to their account as a percentage of salary this will happen automatically.
Many retirement planning models work on determining a lump sum at retirement. To achieve this they take the capital value of all your assets. This will include businesses, rental properties and life style assets such as holiday homes or collectables (art etc). The lump sum retirement figure is then converted in to a monthly retirement income.
The downside of this approach is that some of these assets may well be retained in retirement and the income generated included as part of the monthly retirement income. When projecting forward 20 to 40 years away the income on a rental property (providing tenants are retained) may have a higher probability of being closer to the projections than an investment fund which is subject to the vagaries of interest rates and share market movements.
The inclusion of the current National Superannuation (universal benefit payable from age 65) in the equation also causes debate. The likelihood of receiving as generous a benefit in the future (it is neither means nor asset tested) is quite high if you are over the age of 50. This is due to the establishment of the NZ Super Fund (better known as the Cullen Fund). This money is to supplement the annual tax take spend on National Superannuation while the baby boomers go through the system. Given the number of people working beyond 65 it has been determined this will also alleviate this age bubble.
If you're under age 50 (or more certainly under age 40) National Superannuation may not look like it does today when you retire.
So, as your KiwiSaver account grows you'll likely become aware of it and get curious as to how it is actually working for you. If you seek retirement planning advice or use an online programme make sure that the assumptions and presumptions used in the modeling tie in with your own philosophies and expectations.
Whatever you do, it is something that should be reviewed regularly (2-3 years depending on age). While we all live for today, we need to provide for tomorrow. If we get to tomorrow without enough we don't get the chance to "Do It Over".
If you would like assistance with any retirement planning advice please contact us.