COMMENT:

Kiwi Wealth KiwiSaver has sent me an account summary, which includes my account balance at age 65 at $87,400. It says that will give me $4300 each year from age 65 to 89. It also shows a NZ Superannuation value of $18,729 a year. But I'm expecting to get $16,034.

What is this $18,729 number? What does Kiwi Wealth know? White lie? It makes a misleading summary.

I filled out no numbers. It is the first page you see once you have logged in. It is entirely from its end — all the numbers.

The $18,729 is actually lower than it should be.

A Kiwi Wealth spokesman says that because it doesn't know members' circumstances, its Future You digital tool uses the NZ Super rate for single people who share accommodation and use the M tax code.

However, Kiwi Wealth is a bit behind, as that rate rose to $19,242 a year in April. The numbers will be updated soon, says the spokesman.

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The $16,034 you were expecting is the rate for a married person — which is presumably your situation.

"One of the most common pieces of feedback [on the tool] is that members would like to see a combined retirement income projection with their partner," says the spokesman.

"In response to this, we recently launched a feature that enables our members to add the estimated value of their partner's KiwiSaver account into the calculation (their partner's account does not have to be with Kiwi Wealth in order to do the calculation). This feature also incorporates figures for NZ Superannuation, but uses the rate for couples rather than the single rate.

"Eventually, the member who has written to you will be able to see a retirement income projection with their partner and use the more applicable 'married' NZ Superannuation amount. This feature is currently being piloted by a select few members."

This issue — of not having the right NZ Super numbers for many people — is just one example of the questions that are arising as the whole KiwiSaver industry moves towards giving members:

• An estimate of how much you will have saved by the time you retire.
• What that means, in terms of how much KiwiSaver money you'll have to spend each week in retirement.

From next May, members of all KiwiSaver schemes will find this information on their annual statements. But Kiwi Wealth has jumped the gun by doing its own version already.

Its tool "allows members to make changes to ensure they are in the right fund for their risk tolerance and timeframe, and to assess contributions and the effects of any changes", says the spokesman.

It assumes the member's pay will increase by 2.9 per cent a year, and the return on their savings is based on the returns earned by their particular KiwiSaver fund.

After retirement, the tool assumes the money will be moved to Kiwi Wealth's low-risk CashPlus fund — unless the member is already in the even lower-risk Cash fund, in which case the tool assumes they will stay there.

The member can enter their preferred retirement age, as long as it's 65 or over. And the tool assumes the member's KiwiSaver money will all be spent at 89, at which point they will still get NZ Super. Some people will, of course, also have other savings to supplement KiwiSaver.

Coming soon for all KiwiSavers

This new information for KiwiSaver members sounds great, doesn't it? I thought so too when I first heard about it. But then I began to worry.

The numbers you get will depend on a heap of assumptions. If the assumptions are wrong for your situation, the numbers could be seriously misleading. You might end up much better or worse off in retirement than you expected.

I'm far from the only one with those worries. In June and early July, the Ministry of Business, Innovation and Employment (MBIE) asked KiwiSaver providers for comments on how the numbers should be calculated. "MBIE is now analysing submissions and we expect that decisions will be announced later this year," says a spokesperson.

The paper MBIE sent to the providers makes interesting reading. Here are some key points from the paper, and my comments. Note that what follows is not final. It's just ideas that are up for discussion at this stage.

Retirement lump sum

MBIE is suggesting that assumptions about how the lump sum will be calculated include: You take no contributions holidays or first-home withdrawals, and your contributions rise by 3.5 per cent a year to take pay rises into account.

I suppose it will be too hard for providers to keep track of who is planning what contributions holidays or withdrawals. But it would be great if people have access to a tool that lets them plug in their own numbers and adjust for these things.

The 3.5 per cent pay increase compares with 2.9 per cent at Kiwi Wealth. It seems higher than the usual pay rises, but then again, many people get a much bigger pay increase every now and then when they move jobs.

MBIE also proposes that the retirement savings totals are adjusted for inflation at 2 per cent. That means that if you're told you're likely to have about $200,000 at retirement, that amount will buy then about as much as $200,000 buys now.

This is probably a good idea. It's not helpful to tell a young person that they will retire with $1 million if that will buy only what half a million buys today.

My only worry is that people won't understand the inflation adjustment, so I hope it's explained really clearly.

There are also proposals on how to deal with lump sum payments into KiwiSaver.

Income during retirement

The suggestion is to assume the member retires at 65, and then spends the money at a steady rate for 25 years, at which point there's nothing left.

The second bit is probably fine. By 90, many people report that NZ Super is enough income. But these days many people retire later than 65.

According to Stats NZ, 44.5 per cent of people aged 65 to 69 work full-time or part-time, as do 14 per cent of people 70 and over. And those numbers keep increasing.

And if you work for just a few years beyond 65, that makes a big difference. Not only do you have several more years of saving, but you also have several fewer years of retirement spending.

Note, too, that 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 a return of 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, and so on.

Another proposed assumption is that all the member's money is moved to a conservative KiwiSaver fund at 65.

I would like to see people putting the money they plan to spend later in retirement in a higher-risk fund, as it will probably earn a considerably higher return. But I suppose the Government has to be conservative about how people will, in fact, invest in retirement.

On NZ Super, MBIE notes: "The projected figures would not include NZ Superannuation, but a statement advising the investor that they may be eligible for NZ Super is included alongside the figures."

This is a good way to get around two problems. The first is the one we saw in the Q&A above, about the provider not knowing which NZ Super rate to use.

The second is that nobody knows what will happen to NZ Super in the future.

I'm confident it will still be there, and not slashed in the way some people say. But the payments may not be raised as much as wage rises, or may start at a later age, or who knows what?

Returns earned on your money

MBIE proposes that the Government sets the returns — interest and other money earned on your savings — that providers must use in their calculations.

This is essential. Otherwise providers would probably base the returns they use on recent returns in their funds. And, as heaps of research shows, there's often very little correlation between recent returns and future returns.

There's also the issue of how far back a provider would look. Providers that have done well lately, but not if we go back a few years, may base their returns on a short period.

Others will do the opposite. And members will, for the most part, be oblivious to what's going on.

To keep everything above board, MBIE has hired actuaries to come up with the following after-fees and after-tax returns: In lowest-risk defensive funds 1.5 per cent; in conservative funds 2.5 per cent; in balanced funds 3.5 per cent; in growth funds 4.5 per cent; and in the highest-risk aggressive funds 5.5 per cent.

These returns are conservative, "with the expectation that returns are likely to level-off in the medium term following the recent period of strong growth," says the paper.

There would be a regular review "to ensure that the projected returns incorporate market conditions and trends on an ongoing basis".

It's understandable that MBIE would be conservative about these numbers. If they were to turn out to be too high, people would be expecting to retire with, say, $400,000 and they might have only $300,000.

Example of a calculation

MBIE gives an example of how the calculations might work for Jessica, who is 23, and has $10,000 in her KiwiSaver growth fund.

Contributions to her account have totalled $4000 in the last year.

"At 65 years old, Jessica is expected to have approximately $908,000. Allowing for the effects of inflation, this translates into approximately $395,000 in today's dollar terms," says the paper.

"If converted to a weekly payment lasting for 25 years, this amount is expected to produce $739 per week. This translates to $322 per week in today's dollars."

However, because the numbers are only estimates, they will be rounded.

Some readers will recall a rule of thumb I've written about before: If you have $X,000 at retirement, you can spend $X a week.

For example, if you have $200,000, you can spend $200 a week. That's fairly conservative compared with other rules of thumb, and the Jessica example shows MBIE is being even more conservative. This is probably largely because of the assumption that, at retirement, all the money is moved to a conservative fund.

How to get more info

MBIE expects the new statements will include some "behavioural prompts". These might include, "Where can I get more information?" and "How can I improve my retirement income?"

I hope people will have access to a tool — perhaps on the Sorted website or run by the provider — where they can plug in their numbers and then work out how much better off they will be if they increase their contributions or switch to a riskier fund, either before or after retirement.

It would also be good if they can see how increasing their retirement age, or taking a contributions holiday, or withdrawing money to buy a first home, will affect their savings.

- 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.
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