Mary Holm: Your KiwiSaver future — two numbers tell you what's ahead

COMMENT:

The most important information in the annual statements KiwiSaver members have recently received may not be how you fared in the sharemarket downturn.

For the first time this year, providers have been required to give most members two numbers that have much greater long-term significance:

• An estimate of your KiwiSaver savings when you reach 65.
• How much you'll be able to spend in retirement from those savings.

If you switched provider during the year ending March 31, you won't get the projections this year, but you should do next year. Others to miss out are people who were under 18 or over 65 on March 31. But everyone else should find the information on their statements.

All providers calculate their numbers the same way, using government rules. The following are some points to note about the projections.

No guarantees

Neither the Government nor your provider is guaranteeing you'll have the projected totals. They are just estimates.

Inflation allowed for

Both numbers are adjusted to remove the effects of inflation. So, if you're told that at 65 you will have about $200,000, that means you'll have an amount that buys as much as $200,000 buys today.

And if that amounts to spending $230 a week in retirement, you'll be able to buy what $230 buys today.

Because of inflation, your actual retirement balance and spending amount will be much bigger than that, especially if you're young. But the inflation adjustment makes the numbers more meaningful now.

The providers assume inflation will be about 2 per cent a year.

Spend until 90

The retirement weekly spending numbers assume you retire at 65 and spend your savings until you turn 90, by which time you will have used up all the money. Presumably, officials figured that people over 90 can get by quite well on just NZ Super, and indeed, lots of older people say that.

Your weekly spend also assumes you leave your money in a KiwiSaver lower-risk fund through retirement.

You'll find that the spending money is more than your lump sum divided by the 25 years from 65 to 90. That's because, as you go through retirement, your money is sitting there earning compounding returns before you spend it.

For example, if your savings total $100,000, dividing that by 25 gets you $4000 a year. But in fact you'll be able to spend more than that.

The spending numbers exclude money you'll get from NZ Super and any other savings.

No breaks

The savings total assumes you continue to contribute as you've been doing in the past year.

There's no allowance for savings suspensions (formerly contributions holidays) or withdrawals to buy a first home or for hardship. And the retirement spending assumes you don't make any lump sum withdrawals during retirement.

Pay rises

The savings total assumes your pay increases by 3.5 per cent a year, and that your contributions rise by the same amount.

This is probably reasonable for employees. Even if you haven't had big pay rises lately, over time most people's pay rises are higher than inflation. And every now and then you get a bigger jump, when you're promoted, or move to a new job.

This assumption won't work well, though, for many self-employed people or other non-employees who contribute $87 a month or $1043 a year — just enough to get the maximum government contribution.

Of course, you can always raise your KiwiSaver contributions each year. But if you stick with $1043, your savings won't grow as much as the projections. The younger you are, the bigger the difference.

One-off contributions

If you've made any one-off contributions in the year ending March 31, the calculations will assume you do the same every year until you turn 65. But these will be capped at $1500 a year, to exclude occasional large contributions such as an inheritance.

Returns while saving

The calculations don't take into account how well your particular provider's fund has performed lately. That's because past performance is no guide to the future.

Instead, they assume the following returns, after fees and 28 per cent tax: in all of the lowest-risk defensive funds, 1.5 per cent a year. Then it's 2.5 per cent in conservative funds, 3.5 per cent in balanced funds, 4.5 per cent in growth funds, and 5.5 per cent in the highest-risk aggressive funds.

Some critics say those rates are a bit high, and presumably they will be reduced in future years if that's found to be the case.

When calculating retirement spending money, providers assume returns on that money will be 2.5 per cent after fees and tax.

That may also be a bit high for cautious people who want all their money in a low-risk fund at that stage. On the other hand, some will want the money they plan to spend later in retirement to be in a fairly high-risk fund.

But what if you're different?

What should you do if you don't fit the assumptions? You might plan to retire before or after 65, or make a withdrawal to buy a home.

Or maybe you want to see how much difference increasing your contributions or moving to another type of fund would make.

There are a number of KiwiSaver savings calculators on provider websites and elsewhere. Some will let you make adjustments to suit your circumstances.

And from now on, KiwiSaver providers have to use the same assumptions in their calculators. This is a great step forward from when some providers made their KiwiSaver schemes look better by using rosy assumptions.

I recommend the KiwiSaver Savings Calculator on sorted.org.nz. Its projections assume inflation at 2 per cent, but you can turn that off and get non-adjusted numbers. You can change your retirement age, fund type and contributions. To check the assumptions used in the calculations, click on "How this tool works" at the top.

While you're at it

You might want to check that you're getting the most from KiwiSaver. See Getting a KiwiSaver WoF on the home page of maryholm.com .

What to do if your numbers look too low

There are three steps you can take:

• Increase your contributions. These days employees can contribute 3, 4, 6, 8 or 10 per cent of your pay. And every member — employee or not — can always contribute more, either regularly or occasionally, directly to their provider.

• Move to a higher-risk fund, which will have higher average returns. Note, though, that riskier funds are also more volatile, so you have to be prepared to see your balance fall sometimes.

• Plan to work beyond 65. This helps you in two ways: you have more years of saving; and fewer years to fund in retirement. What's more, your savings grow fast at that stage if you're still working. Let's say you've saved $500,000 at 65. Even if you earn only 3 per cent on that — after fees and tax — that's $15,000 extra in a year, and a bit more the following year because of compounding.

- Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.