Increasing sums of money will be paid out of maturing KiwiSaver accounts in the years ahead. Cautious recipients will be terrified of losing their lump sum and will put it all into bank term deposits, yielding virtually nothing after tax and inflation. Others will view their matured KiwiSaver proceeds as something akin to a Lotto win and will treat it accordingly.
The result is that for most people, all those years of saving will not result in a more comfortable retirement.
A solution? The only practical solution that I can see to head off a looming train wreck is a change to the present conditions under which financial institutions are able to offer annuities.
Annuities offer huge benefits to the annuitant, and not just the obvious advantage of a regular reliable income with reasonable security. Even with my background in finance, I can see the task of controlling a widely diversified portfolio becoming increasingly onerous as I get older.
Annuities avoid the ongoing problem of portfolio administration.
But to fill this obvious gap, annuities must be made more attractive to both institutions and to the people who would benefit from them.
I'm not saying this will be easy, and it may be necessary in the short term to establish a government-sponsored agency to offer annuities while a market with some depth develops.
Normally, the purchase of an annuity would of course be a personal decision. However, to be of real benefit to living standards in retirement, it is essential that, say, 80 per cent of all payouts of KiwiSaver proceeds be used to purchase an inflation-adjusted annuity.
You are probably too pessimistic about the wisdom of retiring New Zealanders. But still, I wholeheartedly agree with most of what you say.
For the benefit of others, when you buy an annuity you give an insurance company a lump sum. In return, they give you a monthly payment until you die. If you die soon, it's a bad deal, but if you live to be really old, it's a great deal.
Basically, it's insurance against outliving your savings and, as you point out, an easy way to manage your income in retirement.
You can get various features, such as guaranteed payments for 10 years, with payments going to your estate if you die before then. Or you can get annuities for couples, with smaller payments to the surviving spouse after the first one dies.
I haven't heard of any company offering inflation adjustment as such. But in exchange for accepting a lower monthly payment to start with, you can have the money automatically increase by, say, 2 or 3 per cent a year, to allow for inflation.
About 20 years ago, there were maybe a dozen companies offering annuities in New Zealand. Now I think Fidelity Life is the only one. There are several reasons - to do with tax, a lack of suitable investments in which the insurance companies can invest the money, and so on - that make them rather unattractive deals in this country.
But you're right - as KiwiSaver money becomes accessible, the need for annuities will increase. Government help may well be necessary to get things rolling. How about it, Wellington?
No tax on KiwiSaver
I am over 65, collecting superannuation and will have been a contributor to KiwiSaver for five years in August.
As I intend withdrawing my KiwiSaver funds this year, will I be taxed on any of the money, and if so how much?
There's no tax when you withdraw KiwiSaver money. It's all yours, just as if it were in a bank account.
However, you - and every other person in KiwiSaver - do pay tax regularly on the returns your fund earns. The provider takes care of it, but they should list the tax amount on the statements they send you.
I thought I'd tell you my experience of KiwiSaver.
I joined at the start, and chose my own provider, rather than a default scheme. In four years, for a contribution of about $6000, I have an asset worth a bit over $15,000. I can't think of many other legal investments where I could achieve that sort of return.
Yes, the returns will be reduced in future, but that helps to emphasise the importance of joining at the beginning.
By the way, I never expected the government incentive would remain unchanged forever, and I've always had the understanding that my employer would eventually recover the employers' contribution from me in the form of lower wage rises.
All things considered, it still remains worthwhile, if you can afford the deduction to your income - in my case about $30 a week.
Glad I joined? Yes. Would I join the scheme today, under the current set-up? Possibly not. Why? Continual government meddling.
In the Government's defence, KiwiSaver was put together in a rush, so change was inevitable. The more recent changes have also been driven by the need to curb government spending. And if we think about fairness to taxpayers who are not in KiwiSaver, it's hard to argue with the reduction in the tax credits and taxation of employer contributions.
Still, you're right, there have been too many changes to keep up with. Here's hoping for a few years of peace after the current lot. Not joining because of the "meddling" seems a bit of an over-reaction, though.
Your assessment of KiwiSaver - in terms of money you have contributed compared with your total savings - is one approach. Here's another, from a reader we'll call Fred, who has also been in KiwiSaver from day one:
"At the end of December my contributions (from all sources) equated to $31,000, with a fund value of $29,000. The fund had lost money."
Fred is counting all inputs, whereas you are counting just your own. Your perspective tells you whether it's worth being in KiwiSaver. Fred's perspective tells him whether his KiwiSaver fund has performed well.
Fund performance is important, and so far, many riskier KiwiSaver funds have performed poorly, as Fred points out. But that's hardly surprising when you look at the global financial situation.
On the positive side, putting KiwiSavers through such volatile markets early on in the life of the scheme has probably prompted people who realise they can't tolerate volatility to move to lower-risk funds. The goats and sheep are now in the right paddocks. And in the meantime, nobody has lost a fortune because KiwiSaver balances are still small.
In the longer run - and most KiwiSaver accounts are long-run investments - we expect riskier funds to bring higher average returns than low-risk funds. We will still need Fred's type of analysis, to check up on performance, as well as yours.
I'm responding to the question about what is considered a reasonable weekly allowance for a university student.
As a parent of five boys, three of whom have gone through or are currently going through university, we have always said we would provide our sons with free board and food and use of the family car when necessary. We have not paid any university fees, course costs or entertainment costs.
We have certainly not paid them a living allowance, either! They have student loans and all have had part-time jobs to provide the fun money.
The three boys have their own cars, which they have paid for, fully registered and warranted and also insured in their own names. All this was paid for through their own hard work and motivation to get part-time jobs while studying.
The eldest son has since finished university, is now flatting and works full-time in his field, paying back his student loan. The next son is studying away from home, has a student loan and a student allowance. He also has a part-time job. The third son is about to start tertiary study and will live at home. He, too, will have a student loan. He also has a part-time job.
All boys are thriving as they are living their dream that they appreciate and have worked hard for. We are very proud of them!
And well you might be. Clearly they will all have earned whatever good fortune their university qualifications bring them.
Treating siblings fairly
Here are the decisions that we took for our children. All three went to university, with two staying at home while one had to live in another town. Course fees for all three were paid for by student loan.
For the two students who stayed home, we provided for all their needs, except for incidental course costs such as textbooks, daily transport and discretionary expenses, hence we decided to provide no additional allowance. Both undertook paid work in the holidays, which funded their course costs, daily transport and discretionary spending.
The home environment included good technology support with a computer available for each student. Neither took student loans to pay for living expenses.
For the student that had to live away from home, we initially provided a new laptop (which had to be replaced once) and an allowance equal to the amount of a student loan to cover living expenses, about $160 per week. In the third year of the five-year course, we provided a car to enable the student to travel to work experience venues.
Over time, we measured that $160 per week for living expenses wasn't enough, so we increased it to $300 per week. The nature of the university course (veterinary science) precluded this student from doing paid holiday work, as the holidays were generally used to undertake required work experience, usually unpaid.
For the record, the student living away from home still drew down the student living allowance loan amount but banked it earning interest, with the intention of repaying it at the end of the course to benefit from the 10 per cent bonus for early repayment.
I think that each family will reach its own conclusions about what is appropriate within its ability to pay, and taking account of the particular requirements (and attitude) of each student, the course, and their opportunities to generate other income. That is probably the only right answer for each family.
You negotiated well the tricky path of treating siblings fairly, even though their circumstances are different. There's some interesting common thinking in yours and the above letter, too.
Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to email@example.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.