Diana Clement

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Diana Clement: KiwiSaver rise no guarantee of happy retirement

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Few people understand how much money is needed to fund lifestyle

When Gen Xs and Ys retire, they'll need a lump sum of about $430,000 to maintain an average lifestyle. Photo / Getty Images
When Gen Xs and Ys retire, they'll need a lump sum of about $430,000 to maintain an average lifestyle. Photo / Getty Images

Sorry, New Zealand - the new KiwiSaver rates aren't the answer to your retirement savings. From Monday, the minimum employee contribution to KiwiSaver will go up to 3 per cent, matched by 3 per cent from employers.

If anyone thinks this is their retirement sorted, they're wrong.

"A lot of people think opening KiwiSaver accounts mean they have their retirement planning under control," says Jeff Matthews, senior financial adviser at Spicers Wealth Management.

Just look at the Aussies. They are putting aside 9 per cent each month towards retirement, and that's expected to increase.

Almost everyone says the KiwiSaver change is "a good start". But it just isn't enough to guarantee a comfortable retirement. The figure is more like 10 to 12 per cent if you start young, says Matthews. Or more if you don't start saving for retirement until age 40 or 50.

Everyone has different needs in retirement and they should plan their dotage income on an analysis of their spending, rather than on a percentage of pre-retirement income.

"Most people don't have a good handle on what their living expenses are, and even fewer people have any idea how much money is required to fund that lifestyle," says Matthews.

As a rule of thumb - the average weekly household expenditure of $1010 a week adds up to $52,520, and would take a lump sum of about $860,000 to generate that income for 20 years, says Matthews.

That excludes New Zealand Superannuation. Even if NZ Super is in place when Gen Xs and Ys retire, they'll need a lump sum of about $430,000 to maintain an average lifestyle. The big "but" is whether there will be NZ Super when the younger generation retires (or even the youngest baby boomers). "For most people, those are going to be scary numbers," he says.

Most retirement predictions include NZ Super at current levels adjusted for inflation. But Matthews and others say the country simply can't afford that. There's a "tsunami" of baby boomers about to hit the collect window for NZ Super. During the 1960s, 7 to 8 per cent of the population were superannuitants.

Today the figure is 12 to 13 per cent, and it is projected to reach a quarter of the population in 2051, says Matthews. That's partly because of the post-war population boom and partly because we're living longer.

With more and more people passing Go and picking up the pension, the money to fund it has to come directly out of taxes. What's more, as the percentage of oldies grows the number of taxpayers working to pay for their retirement income is going to fall. Or so all the predictions show.

One Sorted.org.nz user emailed the Commission for Financial Literacy to make a very good point. "Did my life expectancy really increase by five years since April?" he wrote. "Great news, except that I found I couldn't really afford it."

Living longer is a double-edged sword. The longer the life, the greater the spending. It's already likely that sooner or later the retirement age will increase to 67, which will save the Government some money.

There is a high likelihood that pensioners of the future will have to foot bigger healthcare costs - especially as medicine advances and we have more cures. Yet one in three people aged over 50 surveyed by Southern Cross Healthcare Group expected the Government to cover all their healthcare costs in retirement.

In the Southern Cross survey, only one in four people felt they had any understanding of just how much they needed to save for healthcare in retirement. And of those, most vastly underestimated the actual costs

"The median amount people thought they would need was $20,000," says Southern Cross chief executive Ian McPherson. "Unfortunately this won't cover a lot over the course of a 15-year plus retirement, and much less once medical inflation is accounted for."

The cost of a new hip starts at $18,000 and a single root canal and crown could cost more than $1500.

Like other Western nations, pressure on our health system is coming from many directions, says McPherson. "We have an ageing population and proportionally fewer taxpayers to fill the public purse, a rapidly increasing incidence of chronic conditions such as diabetes and cardiovascular disease, and an increasing demand for healthcare services."

Kiwis should remember they can contribute more than the 3 per cent minimum to their KiwiSaver funds, says Vedran Babic, operations manager at Fisher Funds Management. They can still elect 4 per cent or 8 per cent, and make even more voluntary contributions.

By now, says Babic, Kiwis would have been paying 4 per cent of their income into KiwiSaver had the Government not made changes during the global financial crisis.

He points out that Australian superannuation started at just 3 per cent in 1992, and didn't increase to the current number until 10 years later. The debate over the Ditch is about how much to increase that by.

Kiwis have a long way to go. In September 2011, Australians had about A$55,000 ($68,500) per capita invested in superannuation funds and Kiwis had just $6000. "That is a direct result of Australia having compulsory Super for so long," he says.

Even if they are saving a big enough proportion of their income, many KiwiSavers are "farting into the wind" by investing their money long term in low-growth conservative funds, says Matthews.

Fisher Funds and others are lobbying the Government to change the KiwiSaver default option to "life stages" funds, which would automatically move savers' money into appropriate growth, balanced or conservative funds as they age. Babic says the exception to that could be people who planned to buy a first home within 10 years of enrolling.

Retiring on NZ Super is a financial struggle for the 40 per cent of retirees who have little or no savings. Ann Martin, chief executive of Age Concern, says NZ Super only covers the basics. "Often what happens then is that the pensioner cuts back on necessities," says Martin.

"They don't turn heating on, reduce their grocery spend and may pull back on social activities, medication and doctor visits.

"We know some older people are also spending the winter in freezing houses to keep the power bill down, [and] older people continue to tell us that looking after their teeth, eyes and ears can break the bank."

Age Concern costed the sample meal plans for older people in the Ministry of Health's Food and Nutrition Guidelines, and found households living on NZ Super alone would have to spend more than a third of their income to eat healthily.

"This would put them in food stress," says Martin. "The more likely scenario is they are cutting out fruit and vegetables in order to make ends meet."

One of the difficulties of getting the "save more" message through to KiwiSavers is that authorised financial advisers don't find it commercially viable to give advice on KiwiSaver, although that will change over time as people's accounts grow.

Nor does everyone have $5, $10 or $15 extra a week to save, says Pushpa Wood, director of the NZ Centre for Personal Financial Education at Massey University.

"There are people whose need is now and they are focused on meeting their needs now, not 20 years down the track," she says. Some people will also have other retirement savings, and perhaps a rental property or two that is slowly building up capital.

Wood says migrant communities tend to view their children as part of their retirement plan. They put money into educating their children, and in return expect to be supported financially through their retirement.

Find out how much 12 per cent of your pay is with Sorted.org.nz's new Save-ulator.

- NZ Herald

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