Perils of KiwiSaver first-home pullouts
First home buyer withdrawals undermine the goal of retirement security by reducing the power of compound interest.
Six hundred million dollars a year is now being stripped from KiwiSaver accounts to fund first home purchases, threatening to leave some people with pinched retirements.
High house prices have left young New Zealanders with little choice but to raid their KiwiSaver schemes to help them buy their first home.
But the long-term consequences are frightening, according to associate professor Aaron Gilbert from AUT’s finance department.
It could leave those who withdraw the maximum to buy a home hundreds of thousands of dollars worse off in retirement, he says.
With house prices in Auckland and Wellington having run riot, Gilbert said the first home withdrawal feature had been a godsend for many looking to get onto the property ladder.
‘‘In fact, in the year June 2016 to June 2017, 33,000 KiwiSavers withdrew $600 million, or around $18,181 per person, for this purpose,’’ he said.
‘‘Given the high costs of housing in an increasing number of regions and cities, and the Reserve Bank’s LVR rules requiring a 20 per cent deposit, the ability to supplement deposits with KiwiSaver money has undoubtedly been necessary in getting people across the line.’’
But, he said it was important not to overlook the long-term impact that these withdrawals had in meeting the purpose of KiwiSaver, which was getting people a comfortable retirement.
First homebuyers could withdraw all but $1000 from their account, he said.
‘‘While data on the loan balance after the withdrawal is not readily available, I suspect a large percentage are taking the lot. In essence, they need to start saving all over, but with fewer years until retirement.’’
The impact could be huge, thanks to the power of compounding returns.
He gave the example of two people starting with $1000 in their account today, both earning $40,000 per year, each invested in the same fund growth earning 7.5 per cent after taxes and fees until retirement.
‘‘Person A, who starts saving at 18, could expect to have $1.16m at retirement, nearly 10 times the amount they contributed.
‘‘Person B, who withdrew the maximum allowed at age 30 for a house would have just $428,000, not quite one-third of Person A’s retirement savings, and only just over four times the amount contributed.
‘‘That’s a whole lot less in retirement.’’
It could be even worse. Gilbert believed many people aiming for home ownership through KiwiSaver withdrawals kept their money in low-growth funds.
Those who were not planning on withdrawing money for a first home had a higher risk tolerance, and could go for higher risk, potentially higher return funds.
‘‘First home buyer withdrawals undermine the goal of retirement security by reducing the power of compound interest.’’
Gilbert said owning one’s own home in retirement was important, as those who ended up renting had higher weekly costs, and so needed to have saved bigger nest eggs.
And he acknowledged that someone who stripped their money from KiwiSaver to buy an Auckland home in 2011 would never have been able to match the capital gain they had made leaving their money in KiwiSaver, though he did not believe house prices could continue to rise like that.
‘‘We don’t know what the future will hold for house prices. There is a perception in New Zealand that house prices always rise, but that’s not true.’’
‘‘The Auckland housing market can’t continue to do what it has done indefinitely.’’
In Japan house prices stagnated for several decades, and after the Global Financial Crisis US house prices halved and, in some areas, never recovered.
So fast have Auckland house prices risen that Gilbert that many even well-earning people have been locked out of ownership.
‘‘I bought the house I live in around five years ago. I would have been 34 at the time, and making good money.
‘‘It was frightening how much the bank was prepared to lend me, but the reality was within six months I would have been locked out of the market.’’
Gilbert said he was speaking out on the issue because he saw a great deal of KiwiSaver focus on people choosing the right kind of fund, and also fees and contribution rates.
But little attention had been given to alternative ways of getting people into homes, and letting KiwiSaver function purely for its intended purpose.
Gilbert is not the only person speaking up about KiwiSaver accounts being reduced to nearly nothing for the purposes of home ownership.
AMP’s Blair Vernon said in June: ‘‘The first-home withdrawal component of KiwiSaver is being used more and more, which is reflective of the reality of the cost of home ownership, particularly in the Auckland market, and of how hard it is to save for a down payment on a house.’’
‘‘The challenge we see when it comes to withdrawing funds for a deposit is more a question of timing.
‘‘If you’re in your 20s you still have time to recommence your KiwiSaver contributions and accumulate savings to fund your retirement.
People aged 30 or over would struggle to save enough for retirement.