Q My wife and I are in our mid-40s with two children at school. We have paid off the mortgage on our modest house and are saving 4 per cent each into our KiwiSaver schemes with our employers putting in 2 per cent. We each earn around $50k pa. We don't have any other savings. My KiwiSaver is worth around $16,500 while hers is $17,100. If we continue at this rate, will we have enough to retire on when we get to 65?
A. You have done well to pay off your mortgage and contribute more than the minimum 2 per cent to your KiwiSaver. By doing this you should have received the full government tax credits ($1042 each year to 30 June 2011, and now $521 pa). The website of the Retirement Commissioner at www.sorted.org.nz has a useful calculator to work out how much you can save through KiwiSaver to age 65. It assumes you are starting from zero, but if I put in your age as 40 rather than 45 and run the numbers through we can get a reasonable estimate. The calculator assumes annual wage increases as well as the impact of tax on employer contributions from April 2012 and the increase of employer contributions to 3 per cent from April 2013. It estimates that you will each have around $241,000 (in nominal dollars) at age 65.
If inflation tracks at 2-4 per cent then $241,000 will not have the buying power that it has today. The sorted website calculator shows it will have the buying power of around $147,000 (referred to as 'today's dollars'). Other websites offer similar calculators and I suggest you try them, as they have different variables such as your expected investment return. Because you are both saving into KiwiSaver at a similar rate, you may each have $147,000 (in today's dollars) at age 65. This will make a big difference in your retirement, particularly if NZ Superannuation is still available to everyone without income or asset testing.
Currently a single person living alone receives $17,676 after tax while a couple (both qualifying) receive a combined $27,194 after tax (at M rate). Your combined KiwiSaver (in today's dollars) of $294,000 may generate an annual return of say 3 per cent net giving you an extra $8820 p.a. If you want to save more, you can increase your KiwiSaver contributions to 8 per cent or make lump sum contributions from time to time.
Will the Government introduce income or asset testing for NZ Superannuation as KiwiSaver balances increase? Both major parties appear reluctant to do so. Such a policy would jeopardise support for KiwiSaver since it is still essentially a voluntary scheme and it would also be unpopular with voters. Labour proposes a gradual increase in the age of eligibility to 67 while National claims that the current universal super at age 65 is affordable under its policies.