This year, there will be a new addition to your KiwiSaver annual statement. For the first time this year, KiwiSaver providers have been required to let members know about two numbers with big long-term significance:
- How much your KiwiSaver is on track to be worth by the time you are 65
- What income this might be able to give you each year in retirement.
You won’t get these projections if you’ve changed your KiwiSaver provider during the year, are already over the age of 65, or are under the age of 18 on 31st March.
There are a few things to be aware of with the projections.
Neither the government nor your KiwiSaver provider are guaranteeing the numbers they are projecting. The numbers are simply estimates, and include a number of assumptions. The numbers will be updated each year and so are likely to become more accurate the closer you get to retirement.
They include inflation
The numbers take inflation into account, so if you’re told that you could have an income of $200 a week in retirement, that’s $200 of today’s money. If you are told your total balance will be $200,000, again, that’s $200,000 of today’s money which is able to buy you the same as $200,000 would today.
Because of this, the actual numbers at retirement will be a lot higher, but then the cost of goods and services will also be higher at that point too. The adjustment is made so that it is more meaningful for you.
Inflation is assumed to be consistent at 2% a year.
The numbers assume that you continue contributing as you have over the past year, and that you don’t have any savings suspensions along the way (breaks from your contributions into KiwiSaver). It also assumes no withdrawals for your first home, so if you haven’t yet made this withdrawal and intend to, this will affect the end result.
If you have made a one-off contribution in the last 12 months, the assumption is that you will continue doing this every year, capped at $1,500 a year to remove any larger anomalies.
The numbers assume that your pay increases by 3.5% a year and that your contributions increase in line with this.
This assumption works well for most people who are employed. Whilst you may not get a pay rise every year, job changes or promotions generally mean a jump in salary.
For self-employed people or non-employees, this assumption doesn’t work so well. If you’re contributing enough to get the government contribution, then you are likely to continue contributing just that amount, and not increase your contributions each year. The younger you are, the bigger the impact this will have to your future projections.
Income until 90
The weekly spending number assumes you will retire at 65 and then start drawing from your KiwiSaver straight away. The assupmtion is that you will keep spending until the age of 90 by which time all the money will have been spent. If this happened, you would have to live just on the NZ Super after this point.
Another assumption is that when you turn 65, your funds are moved into a lower-risk fund. They are expected to earn more than cash, but not take too much risk along the way. The assumption is a net 2.5% annual return.
Returns until 65
Lots of assumptions are made about this. After fees and tax (at 28%), the following flat net returns have to be assumed:
- Defensive funds – 1.5% pa
- Conservative funds – 2.5% pa
- Balanced funds – 3.5% pa
- Growth funds – 4.5% pa
- Aggressive funds – 5.5% pa
If you don’t fit into some of the assumptions made in these calculations, there are lots of other ways you can work out your own estimates factoring in what you know might happen along the way. Sorted.org.nz has some great calculators on their site which are well worth a look. The FMA has also produced some great video case studies illustrating what projections might look like for different people. Have a looksee here.
Going forwards, you will see these numbers every year in your KiwiSaver annual statement. They are a great starting point to give you a reasonable idea of how you are tracking but can also show you if you need to make changes.
If your numbers look low, you can make changes:
- Increase your contributions. Through your salary, you can contribute 3%, 4%, 6%, 8%, or 10% and you can also make voluntary contributions outside of these numbers direct through online banking.
- Increase the risk you are taking within KiwiSaver. Moving to a higher risk fund will mean more ups and downs along the way, but it also means a higher expected return.
- Retire later than 65. The longer you work, the longer you defer the income drawdown from your KiwiSaver, and the more you can save along the way. In the meantime, your KiwiSaver fund will continue growing as well.
All of our clients are able to get advice on their KiwiSaver as part of the service we offer, at no additional cost. We have tools and projections we can use to help get you on track if you’re not heading where you want to.
The more information you have, the better decisions you can make, and the better the retirement you can have.