Video: Carmel Fisher comments on the May 2011 budget KiwiSaver changes
It was inevitable. The government is struggling financially and Budget 2011 made Kiwisaver less attractive than its former self.
In one fell swoop the government cut its contribution to individuals’ Kiwisaver accounts in half. Instead of getting dollar for dollar up to $1042.86 of savings a year, you’ll get 50c for every dollar saved, when the changes happen.
That doesn’t mean it’s time to save less, or give up on Kiwisaver. In fact almost all of us should be saving more for our retirement – both in Kiwisaver and other investments.
Let’s say you’re aged 40 and earning $60,000. You take the $1,000 Kiwisaver kick-start and save 3% of your gross salary amounting to $1800 a year. Add to that matched contributions of $1800 from your employer and a $520 member tax credit. Over 25 years at a 6% average rate of return, 3% inflation and 30% tax rate, you’ll end up with the equivalent of $121,492 in your Kiwisaver account, come retirement.
Without wanting to bore the pants off readers, there are lots of ifs and buts. I’ve used a 3% inflation rate, whereas it’s running at 4.5% currently, which has an evil effect on retired people’s lump sums. Also, a 6% investment return is probably being hopeful.
Upon retirement it’s not sensible to take the entire $121,492 lump sum and blow it. If you spend wisely taking up to 5% of that capital a year ($6074.60), the lump sum would last just into your 90s – although tax would eat into the returns.
Sound good? Let’s get real here. That $6074.60 is chicken feed. In today’s terms, that mean a single retiree would be receiving a total of $23,570 per annum. It’s slightly more complex for a couple. If both had earned $60,000 each for those 25 years and saved at the same rate, they’d get $39,342 between them.
It’s not going to pay for that many extras in life. You’re not going to be cruising the world, owning your own boat, or eating at expensive restaurants, as all the advertising images of retirement show.
Saving 10% of gross income for retirement is a much more realistic figure – providing you’ve started by the age of 40. Add the 3% employer’s contribution and the $520 tax credit, the lump sum would grow to the equivalent of $243,982 after 25 years. That’s nearly $13,000 a year over NZ Superannuation, but still not a king’s ransom.
Before I finish, I want to give a thought to the under the mattress rate received by some of Kiwisaver’s most vociferous critics. They say, over and over again, that they don’t trust the government and choose to invest their own money.
Taking the same 10% of a $60,000 salary over 25 years with the same variables, but not employer or government money, and no kick start, the total would be $174,985. True there will be some of these naysayers who beat the fund managers. Most won’t.
Whatever you choose to do, there is a case for Kiwisaver as part of a wider portfolio. And there is a reason to be saving more than the minimum.