Most people take a "set and forget" approach to KiwiSaver – but it's one of the most important investments they will have.
Annual KiwiSaver statements now include more information to help people understand their investment – and a change to the statements this year means the value of the investment will be made clearer.
The Financial Markets Authority, which regulates the investment sector, carried out a survey in 2018 that revealed 66 per cent of people with a KiwiSaver plan never check to see if their savings will provide them with a comfortable retirement.
It discovered savers wanted their investor statements to show a projection of their KiwiSaver balance at age 65. That has now happened – and that prospective balance at age 65 is a part of the annual KiwiSaver fund statement.
The new projection looks at the current fund type, KiwiSaver balance, and contributions during the year – and creates a picture of what your KiwiSaver might look like in the future (using a set of standard assumptions set by the Government).
By seeing the projected retirement figure as a lump sum (which is not guaranteed), and what that amounts to weekly over 25 years of retirement, people can decide if the projected amount will be enough. If it isn't, then there are a few ways to address this.
Gillian Boyes, the FMA's manager investor capability, says: "The retirement figure shown on the statements reminds people of what they are likely to receive. They might be really pleased with the amount or they might want to do something to increase the projected figure."
She gives the example of a schoolteacher earning $52,000 a year and contributing three per cent of her salary to KiwiSaver for two years. Her statement shows she currently has about $6500 in a KiwiSaver growth fund. The projection estimates that she'll have $309,784 in her KiwiSaver by the time she is 65. Combined with NZ Super, that will give her about $743 a week in retirement for 25 years.
Boyes says savers can add lump sums to their fund, increase their weekly contribution and consider moving their investment into a less conservative fund. A conservative fund will typically produce lower returns than a growth fund (which involves slightly more risk where the money is invested).
"If you are young and your scheme has defaulted to a conservative fund, then the projection you'll see would be quite low compared to a growth fund," says Boyes. "Savers will need to look at their fund's investment settings.
Boyes quotes another example – this time of 32-year-old electrician Lucas, earning $67,000 a year. He's been contributing three per cent of his wages to a Default Conservative KiwiSaver fund for the past 13 years, his current statement shows he has $25,000 in his KiwiSaver fund. The projection estimates that he will have almost $200,000 when he's 65 ($195,308). Including NZ Super, that would amount to $584 a week (assuming Lucas lives to 90).
However, if he moved his money to a Growth fund, the projection estimates that he'd have almost $100,000 more when he retired - $283,915, or $717 a week.
"The genius of the KiwiSaver scheme is that a lot of the hard work is done for you. Most KiwiSaver schemes have an online risk appetite tool that help you work out the best type of fund for you – depending on your reason for saving – retirement or a home deposit – and how comfortable you are with volatility over time," says Boyes.
Increasing regular contributions to KiwiSaver is as easy as asking your employer or payroll department to raise the amount you pay in to the fund. Self-employed people can increase their contributions directly with their KiwiSaver provider.
"Far and away the biggest increase in retirement funds is if contributions are increased," says Boyes. "While this may be difficult while we all work through Covid-19, it is something to consider once we put it behind us.
"Increase your contributions if you can – because that makes the biggest difference – and if you can't, then review the type of fund you are in."
An example is a couple – let's call them Dave and Fiona. Dave (46) earns $160,000 as an HR manager, while his partner Fiona (45) earns $95,000 working part-time as a GP. Their KiwiSaver statements show Dave has saved $72,000 and Fiona $32,000. Fiona took time out of the workforce to raise their children so she has quite a lot less than Dave, even though they both joined KiwiSaver at the same time and are both in Growth funds.
Combined, Fiona and Dave will have around $500,000 at 65 ($543,362) – around $1212 a week including NZ Super. If Fiona and Dave both contributed four per cent of their salaries to KiwiSaver, instead of their current three per cent, they'd have more than $600,000 when they retire ($612,809)
While Boyes concedes KiwiSaver has been affected by Covid-19 rattling global sharemarkets, she wants to remind savers it is a long-term investment plan – and experience shows that, long-term, peaks and troughs are smoothed out over the years.
Some people, she acknowledges, may face financial difficulty due to redundancy or reduction in income, and KiwiSaver won't feel like a priority right now. But she says KiwiSaver will be "a good news story" for them in the future – and strongly suggests discovering what KiwiSaver will be worth to them.
Boyes also recommends savers also look at the fees charged by the company managing your money: "If you think they are high then shop around."
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