Mary Holm: Keeping your savings on the right track

There are tools to check if you'll have enough for retirement. Photo / 123RF

Do you know of any KiwiSaver guidelines that show how much you should expect to have saved by various ages? For example, by 40 you should aim to have $x to $y to have enough for retirement.

Naturally it would be a range, as everyone has different incomes and retirement expectations. I would like to know if I'm on track with my KiwiSaver savings.

I haven't seen guidelines quite like that — probably because the numbers depend on many variables. But there's a tool that will give you some idea of how well you're doing.

Let's start with an important question: how much you do want to spend in retirement — over and above NZ Super?

Currently, NZ Super is about $390 a week for a single person living alone, and $600 for a couple who both qualify for Super. That's after tax if you have no other income. For other rates, see tinyurl.com/NZSuperRates

Of course, we can't predict how that might change. But if you're older than 40ish, it's probably safe to assume it will be about the same as now in terms of what you can buy with the money. If you're younger, it might be a bit lower — but I doubt if hugely lower. See the next Q&A.

Now, let's say you would like to spend $200 a week above NZ Super. Go to the KiwiSaver Savings Calculator on sorted.org.nz, which will give you a rough estimate of your KiwiSaver balance at 65, and how much you can spend per week in retirement.

If it's less than $200, there are two steps you can take:

• Make extra contributions to KiwiSaver. On the calculator you can increase your work contributions to 4 or 8 per cent of your pay, or add extra one-off or regular payments. Make adjustments until you get to $200 a week.
• Reduce the age you enter for your life expectancy — from the average of 91 for males or 94 for females. I'm not suggesting you plan to pop off younger! But the calculator is actually looking at when you'll use up your KiwiSaver money, rather than when you die. Many people say NZ Super is enough once you're in your mid-80s. If it's not, you could move to a cheaper home, sell some assets, use rates postponement offered by many councils or take out a reverse mortgage. So switching your "life expectancy" to, say, 85, is not unreasonable.

The calculator's results are adjusted for 2 per cent inflation. So if it says your balance at 65 is $300,000, that means your savings will buy the same as $300,000 buys today. You can switch off the inflation adjustment if you prefer.

There are some other important points about this calculator. For details, click on "How this tool works". But the main points are that it assumes:

• If you're employed, your pay will rise by 3.5 per cent a year, so your contributions will rise to match. If you're not an employee, it assumes your contributions will increase with inflation — a dodgy assumption given that many non-employees have always contributed $1043 a year to maximise their tax credit. But I suppose the government will sometimes increase the tax credit — and these people will then raise their contributions.
• You take no contribution holidays and make no first-home withdrawal.
• You will retire at 65. If you retire at, say, 67, you'll have quite a lot more savings. That's because your balance at 65 is big, so even a 3 per cent return on that money amounts to a lot. For example, if you would have $500,000 at 65 but retire at 67, you'll have more than $30,000 extra.
• You invest in a balanced KiwiSaver fund, and your annual return, after tax and inflation, ranges from 2.4 to 3.3 per cent depending on your tax rate.

A balanced fund is middle-risk. If you are in a lower-risk defensive, conservative or default fund, your balance at retirement will probably be lower than the calculator says. And the younger you are, the bigger the difference.

If you're in a higher-risk growth or aggressive fund, your balance will probably be higher. Again, the difference will be bigger if you're younger.

Don't know what type your fund is? Go to the KiwiSaver Fund Finder on Sorted and click Check Your Current Fund. Fill in the fund name and click. On the top right side it will tell you the fund type.

What if you don't even know your fund's name? Ring Inland Revenue on 0800 KIWISAVER (0800 549 472). You'll need your IRD number.

See what I mean about variables? Still, this should give you a rough idea of how you're doing.

Saving too much?

I'm starting to wonder if I'm putting too much aside for retirement.

I'm single, 40 and earn low six figures. I own my home and pay extra off the mortgage, so it should be completely gone in 14 years. I pay 8 per cent towards my KiwiSaver, which currently has a balance of $50,000 (I used it for a house deposit and have since rebuilt it). I have no other debts.

I would love to travel and do some cosmetic upgrades to the house, but I'm quite conscious that the pension may not be available by the time I retire, and that I may have to rely on my own savings once I stop working, which I don't expect to do before 70, but who knows what life brings?

Should I reduce my KiwiSaver to 4 per cent and use the extra income for things like travel and home maintenance, or invest that extra money another way, or just continue as I am?

I vote for cutting your KiwiSaver contributions to 3 per cent and spending the money on travel and other fun things.

Check your KiwiSaver situation as described above. I think you'll find you're in a strong financial position.

As far as NZ Super goes, there's no way it won't exist when you retire.

Payments are currently increased each year at the same rate as the average wage. This usually grows faster than inflation.

A few years ago, Treasury was looking at what would happen if, instead, NZ Super was increased by inflation in future decades. But they rejected that as being too tough on superannuitants, and were considering raising payments by somewhere between wage rises and inflation. That's a far cry from stopping Super altogether.

True, the number of retired will increase compared with the number of working New Zealanders over the next few decades. But our birth rate is higher than in many countries, so the baby boomer squeeze is not as tight.

Remember, too, that superannuitants are voters. By the time you retire, Super may start at an older age, and grow at a slower rate than now. But it will still be there.

Tax-free withdrawals

Following on from the correspondence about KiwiSaver funds being tax exempt as far as NZ Superannuation is concerned, I have over $100,000 invested at a bank at 3.30 per cent for six months.

As I have just turned 65, it seems I would be much better off depositing the funds in my KiwiSaver account on a conservative setting.

I would be able to make withdrawals whenever I wanted, plus my earnings would be tax-exempt. Your comments?

Let's not get confused. In the past couple of weeks I've been saying you don't pay tax on withdrawals from KiwiSaver or other managed funds. It's the same as withdrawing from a savings account or term deposit on maturity.

However, you are taxed on interest earned in all of the above savings or investments. And NZ Super is not affected by any of this.

So forget about tax. You're correct, though, that after 65 you can withdraw KiwiSaver money whenever you want, as long as you've been in the scheme at least five years.

What about returns? In a conservative KiwiSaver fund, they have probably been more than 3.3 per cent recently, but they will sometimes be lower — and occasionally negative.

In these funds, 10 to 35 per cent of the investments are "growth assets" — usually shares and sometimes also property. And their values can drop significantly.

Also, conservative funds hold lots of bonds. These are like term deposits. The investor receives interest, and gets their money back at the end of the term — unless the bond issuer defaults, which would be unusual in a KiwiSaver fund.

But there's an important difference from term deposits. The investor can sell bonds during the term, and the price will be different from what they originally paid. Here's what happens:

• If interest rates have fallen since the bond was issued, the bond will be attractive and people will pay extra for it.
• If interest rates have risen, people won't buy the bond unless they get a bargain, below the issue price.

You might think that won't affect you in a KiwiSaver fund, as you're not buying and selling. But the fund managers may be. Even if they're not trading, some investors in the fund will be withdrawing to buy a first home or retire.

That means the fund managers must keep revaluing their bonds to current market prices. And if interest rates have been rising, investors' balances may fall.

Sorted's KiwiSaver Fund Finder tells us that the average KiwiSaver conservative fund's return in the year ending March 2009 — during the global financial crisis — was minus 1.31 per cent. And one conservative fund's return was minus 13 per cent that year. That's rare. But it can happen.

As I write this I worry. I'm not suggesting all risk-averse people move to the lowest-risk defensive KiwiSaver funds. To do so is to kiss goodbye to any but low returns.

But if you're in a conservative fund, you need to be aware that your returns may sometimes be negative. When that happens, tough it out. It won't last.

Where does that leave our correspondent? Depending on your risk tolerance, perhaps with some in term deposits and some in KiwiSaver.

What income counts?

You mentioned two weeks ago that the employer's KiwiSaver contribution is calculated on the employee's entire pay including overtime and bonuses.

While the examples you gave referred to taxable income, what is the situation re non-taxable income? For example, I receive a fixed sum allowance for the running cost of my car (as I am driving between locations most of the day as part of my work). Should KiwiSaver be paid on this?

I assume not. As I do not get pay slips, and have yet to receive a KiwiSaver statement, I do not know if it is included.

Your assumption is correct.

"Generally, non-taxable reimbursing allowances, such as the vehicle allowance outlined by your correspondent, are not included when calculating the employer's contribution and employee's deduction to KiwiSaver, as they are exempt from income tax," says an Inland Revenue spokesperson.

"This presumes the running cost allowance is a reasonable estimate of, or reflects, actual costs," he adds.

"The employer should be able to provide their employee with enough information about how their contributions/deductions are being calculated and may be able to provide a payslip if requested."

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a 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 mary@maryholm.com or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. 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.