Is your KiwiSaver contribution rate too low? Most likely, yes 

14 April 2022

Is your KiwiSaver contribution rate too low? Most likely, yes 

When it comes to building a great retirement, there’s no one-size-fits-all magic solution: it all depends on the lifestyle you have in mind, but the bottom line is the more you contribute, the more money you will have to enjoy things later on. The caveat, however, is finding the right balance between making some sacrifices now or in the future.  

A good place to start is by looking at your current income and KiwiSaver contribution rate to see how you are tracking along and look at whether you need to make some changes.

So, with this in mind, the next question you should be asking yourself is:


How much do you actually need for your retirement? 

Do you know what you need to retire comfortably? Saving $500,000 or $850,000 may sound overwhelming, or it may not mean much to you at all. Regardless of your view let us put the big numbers aside for a moment, and instead look at it as your desired weekly income (how much you think you could comfortably live off each week).  

Massey University’s NZ Retirement Expenditure Guidelines show, that NZ Super on its own is unlikely to be enough for almost any kind of retirement – no matter how frugal or expensive. Using current NZ Super rates as an example, if you’re a couple where both partners qualify, you’ll get $712 in superannuation per week. The question is, how does that compare with your current weekly income? That’s the gap you’ll need to bridge.  

Depending on your circumstances, and whether you own your home or not, it’s probably safe to aim for 70 to 100 per cent of your current weekly income, including NZ Super. If you rent, you may need 100 per cent, whereas if you own a home mortgage-free, a 70 or 80 per cent income may be enough. 

In other words, entering retirement with a mortgage-free home helps as you won’t have to cover mortgage or rate payments with your savings. But that’s different than relying entirely on your house to pay for your retirement. Many Kiwi homeowners assume this will be the case, only to realise – come time to downsize – that they like where they live and wouldn’t sell if they didn’t need to.  

That’s why we think it’s best to keep retirement planning and your home separate, just in case. And consider how other sources of income, like KiwiSaver, can help you achieve your goals. 

Lastly, a couple of words on budgeting while in retirement. Over time, it’s likely that your spending needs will change, just as your lifestyle will likely change. While many of your current bills may remain the same, you may have plans to spend more on leisure in your first years of retirement. And as you get older, other costs may gradually increase: for example, you might need to provision more for healthcare in the later years of retirement.  It’s another piece of the puzzle to place when calculating your future income needs. 


Will a 3% KiwiSaver contribution rate give you enough? 

Now that you have a rough figure in mind, the next step is to check if you’re putting enough into your KiwiSaver to achieve that. 

One common misconception is that KiwiSaver is a set-and-forget tool: you just choose a fund, contribute the minimum rate of 3 per cent, and let the account ‘simmer’ for 20, 30, or 40 years, and you have your retirement savings ready for you at 65.  

Unfortunately, as our graph below illustrates clearly, that’s not the case for most people. 


Based on starting salary of 80,000 growing at 3.5% per annum between the ages of 30 and 65. Rates of return in line with FMA guidelines (Equities: 5.5% p.a, Fixed Income, 2.5% p.a) 

In this example, we considered an average KiwiSaver member with a starting salary of $80,000 growing at 3.5 per cent per annum between the ages of 30 and 65. If they kept contributing 3 percent and retired at 65, their savings would only be enough to replace 50 per cent of their pre-retirement income. And that’s including NZ Super.

So, if you’re aiming for a comfortable retirement, you should be aiming to contribute at least 8 to 10 per cent. It may sound like a lot, but looking at the average pension contributions in the OECD, you’ll find that the OECD average contribution is 18 per cent, and Australia is scheduled to increase its Superannuation Guarantee rate to 12 per cent by 2025. Of course, unlike many other countries, having a universal pension allows us to contribute less than that, but still not as low as 3 or 4 per cent (or even 6 per cent, in most cases).  


The best day to think about it is today 

The key thing is to ponder the ‘contribution question’ as early as possible and act on it if necessary. The earlier you start, the longer your KiwiSaver has the chance to compound and grow (think of it as a snowball effect). On the other hand, the later you start, the steeper the climb will be to reach your goal. 

Once you’re all set up, you’ll need to make sure to check in every now and then (at least once a year) just to ensure you’re tracking along nicely. Ready to run a few numbers and see how you are tracking? Use our KiwiSaver check-up tool here to calculate what difference changing your contribution rate could make down the line.  


Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance. 


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