Bulk up the KiwiSaver contribution
If you’re on a reasonable income, 10 per cent is the minimum.
OPINION: How much do you weigh? Such personal questions can feel a little uncomfortable. Let’s go further.
How much are you putting away each week? That might get your hackles up, but this isn’t a health survey.
The questions are about money. A topic that’s just as uncomfortable and squirmish.
Our KiwiSaver accounts weigh too little and retirees are reaching the gates of freedom looking malnourished.
Human chubbiness is rife, but we are not a nation of financial fatties, unfortunately. Adding to that, anyone currently below the age of 55 should plan on a new superannuation age of 67.
Despite the problem, there is no clear message from the financial industry on how much we should be saving. We skirt around the edges with soft education.
Look at fees, look at your fund choice, but by golly we couldn’t possibly get loud and make a clear industry statement that responsible adults save a minimum of 10 per cent of income.
Like food producers, it seems fund managers are to blame for our body mass index – they must have stripped out too many fees and managed the money badly. Quite honestly some do, so let’s not deny that. Yet quite a few are doing a good job.
The largest determinant of our underweight portfolio is looking at us in the mirror. Yes you, skinny chops.
What percentage of your income are you putting into KiwiSaver? It’s an uncomfortable question again. Are you saving 10 per cent? If not you’ll be stretched in retirement. Up go the cries of horror. Housing affordability is dire, people have children, lose jobs, marriages breakdown, and health issues arise.
Just like diet and exercise, life throws its curveballs. For many, these issues are too big to overcome, which is why contribution levels are set low.
For New Zealanders on medium to higher incomes, 10 per cent into KiwiSaver is the bare minimum.
The only excuse is if you didn’t know you were supposed to. That’s the fault of the financial industry for not shouting louder than the Government.
The Government set contribution levels at 3 per cent with an additional 3 per cent from employers. That gets you to 6 per cent. Actuarial boffins did not select these low levels. They were pulled out of thin air to ensure everyone can save a little. Use it as a guide at your peril.
There are also options of 4 per cent and 8 per cent, which give 7 per cent and 11 per cent when employer contributions are added. This is not a maximum. Savers should view the largest number as a government suggestion that barely exceeds a realistic minimum.
The most important factor in retirement planning is working out what ‘‘income replacement rate’’ you can live with. No mortgage, lower taxes and not saving means you can live on less.
How much less? An estimated fund value won’t enlighten you, but an income replacement rate hits home.
Researcher Massi de Santis from Dimensional Fund Advisors explains how the 10 per cent rule can give different outcomes.
Adult 1 earns a flat income of $100,000 a year for 40 years, saving 10 per cent. With an investment return of 4.5 per cent their portfolio value is $1.13 million.
Dimensional Fund Advisors estimates this will give a replacement rate of 51 per cent of income ($51,000). The outcome is only healthy due to high earnings in early years, which is unrealistic.
Adult 2 earns $20,000 a year, rising to $180,000 over a 40-year career and also saves 10 per cent of income. With a 4.5 per cent investment return, the portfolio value is $864,000. This gives replacement income of 22 per cent of final salary ($40,000).
While these earnings are beyond most people, it’s designed to show that even high earners face a massive change in lifestyle when saving 10 per cent of income.
The financial industry must get louder about a minimum 10 per cent savings rate, alongside fee and fund education. But where financial health is concerned, personal responsibility comes first and it’s all about quantity.