Peter Neilson: Why you need a $350k retirement nest egg

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The Financial Services Council responds to Tamsyn Parker's money column.
Peter Neilson, chief executive of the Financial Services Council. Photo/Ted Baghurst.
Peter Neilson, chief executive of the Financial Services Council. Photo/Ted Baghurst.

In Tamsyn Parker's column entitled Does Labour's KiwiSaver Plan Stack Up? she asks why the Financial Services Council (FSC) suggests a $350,000 nest egg is needed for a comfortable retirement whereas the Commission for Financial Literacy and Retirement Income suggests a smaller sum is necessary for a 25 year retirement.

The reason is that the FSC projections try to replicate the cost of paying you the equivalent of a second New Zealand Superannuation pension for your retirement and we believe that you will live for longer than the commission does.

Our different results come from differences in the assumptions we use.

• The commission uses the Statistics New Zealand standard mid-range projections for longevity so they assume you will live for 25 years after reaching age 65.

The Statistics New Zealand mid-range projections have consistently underestimated actual longevity after age 65. The FSC therefore uses the Statistics New Zealand Very Low Mortality projections which would see someone retiring at age 65, living 30 more years on average and therefore needing five more years' income than the commission assumes.

• The FSC assumes, based on responses to opinion surveys, that a comfortable retirement requires about another $300 per week above what NZ Super pays, and debt free accommodation by retirement. We therefore assume that whatever you save in KiwiSaver prior to age 25 will be withdrawn to make a deposit on a first home.

• The FSC projections also assume that by 2061 the age of entitlement for NZ Super will have been moved out by two years to age 67 so we have two years when you receive two times NZ Super, all funded from your own KiwiSaver savings.

• Another difference is that, like NZ Super, our KiwiSaver funded second pension increases with the level of wages over the years you are retired so you are compensated both for inflation and the growth of other incomes.

As the Labour KiwiSaver policy phases in over several years, many people retiring prior to 2061 will not have saved the full 9 per cent for the 40 years assumed for both the commission's and the FSC's analysis.

When you make these assumptions a 9 per cent contribution rate to KiwiSaver (split between employee and employer) is necessary.

However, if the government were to adopt a policy of defaulting KiwiSavers into balanced or growth funds rather than conservative ones and reduced the over-taxation of KiwiSaver funds, that 9 per cent could be cut considerably to 7.6 per cent or even 6.1 per cent.

FSC has recommended to the government that the rate of tax on the investment earnings in KiwiSaver (and other compounding savings such as bank term deposits) should be reduced to a more equitable level.

Some argue against lifting the number of people and amount of investment in KiwiSaver because fund managers will make more in fees.

Benefits to savers from this are far greater than any proportional rise in fee income for fund managers.

In fact, as fund volumes and account balances rise, managers will face more competition that is likely to reduce fees.

Investors in KiwiSaver pay fees to professional fund managers, just as you would pay a real estate agent 3-4 per cent of the price to purchase a rental property and 8 per cent of the rental income to the agency that manages the rental on your behalf.

KiwiSaver fees for default funds are negotiated with the government and other KiwiSaver fees have to be approved as "not unreasonable" by the Financial Markets Authority.

Investment fees in KiwiSaver are much lower than those in the Australian compulsory Superannuation Guarantee scheme as has been confirmed by the recent independent Grattan Institute study on the subject.

If people do not like what they are being charged by their provider there are many other providers to choose from.

The Sorted website has a section where you can check how your scheme fees compare with others. Switching providers is also relatively easy.

The real issue is having a KiwiSaver policy package which will double the retirement incomes of those on the average wage over their working lives.

While NZ Super is good, it does not guarantee a comfortable retirement and hundreds of thousands of those receiving it are struggling to pay rents because they do not have mortgage-free homes.

Peter Neilson is the chief executive of the Financial Services Council which represents companies that provide financial services including KiwiSaver and life insurance.

- NZ Herald

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