Why the wrong KiwiSaver contribution might doom you to a baked beans retirement

21 May 2020

Hundreds of thousands of New Zealanders are shooting themselves in the foot for their retirement with paltry KiwiSaver contributions and most don’t even know it yet. 

For some people putting the minimum 3% away is borne of necessity, for others, it’s negligence. 

Whatever boat you sit in, we lay out some free money hacks, a few savings tricks, and a dummies guide to compound interest to make sure you’re getting the retirement you’re after. 

 

Maximise the "Free Money"

There’s only two places in New Zealand where money grows on trees; the government and your work. Getting your hands on it is easier than you think. 

  • Tell your boss to cough up: Contribution matching from your employer is the first and easiest way to get better bang for your Kiwisaver buck. So long as you’re giving at least 3% on your paycheck, your employer should also give you an extra 3% on their own dime. If you’re making $80k, that’s $1,700 extra in your Kiwisaver pocket every year (after deductions for tax). One thing to keep a very close eye on is stingy bosses who have you on a Total Remuneration Package — this means that they will deduct their contribution from your salary. Total Remuneration Packages are legal but frowned upon; like wearing speedos at a public pool. Always ask your employer whether KiwiSaver is on top of your salary or included in your salary.
  • Let the Government give you a hand: Even if you’re the world’s worst Kiwisaver contributor, as long as you remember to give at least $1,041 a year, the government will give you a no-strings $521 injection into your account. Just do it.

 

How much can you retire on?

While you may be second-guessing your retirement cruise post-COVID, you still need to think about how lush you want your final stretch to be. Ideally, you should be aiming for 70% of your current income to have a comfortable retirement. That is a pretty generic number though and won't work for everyone, our suggestion is that you create a detailed budget of what you think you need to live comfortably in your retirement.

Are you prepared to lower your standard of living when you retire? Would you be open to selling your home and downsizing?  These are just some of the questions you need to ask yourself as you set up your KiwiSaver.

 

What you can afford to contribute

You may be thinking, "it's all well for kōura to be suggesting I max out my KiwiSaver but I can't afford to do that!" Totally fair. Only you know the costs you incur. However, keeping in mind the importance of your retirement nest egg, there are a lot of small expenses you can focus on to find savings in unexpected places. When it comes to saving for the long term it pays to remember that every little bit can make a big difference (and no, you don't need to give up on your flat white nor avo toast).  Some interesting things that we found when we were doing our research - also we translate today's savings into future retirement income, because that is what we care about.

  • Rethink your service providers: Did you know that simply moving your electricity, insurance or broadband to the lowest cost provider can save you $10 per week for each provider? If you were to invest this directly into your KiwiSaver fund it would give you an additional $30 per week through your retirement.  If you did all three of these things that would give you an extra $90 per week in your retirement.  That is an extra meal out each and every week for your retirement.  And without any sacrifice on your part at all.
  • How many cars do you really need? The average cost for owning and running a small car is over $6,500 per year in New Zealand. If you can find a way to manage with one less car and invest this into your KiwiSaver, you will have an additional income of $18,000 per year through your retirement.  A very large and material amount.
  • A new way of celebrating a pay rise: A pay rise is also the perfect time to trick your mind into saving more. By timing the increased contribution % to your pay rise, you won't notice the extra money leaving your account and hence you won't really miss it. The same goes for using annual bonuses and monetary gifts from family. Using these to make voluntary contributions into your KiwiSaver is a great idea as you weren't expecting to use this money towards your day-to-day expenses and hence a portion of it can be used as 'gift to your future self'.

 

Why should you care about compounding interest?

Albert Einstein called compounding interest the 8th wonder of the world.  Warren Buffet believes that compounding interest is the greatest contributor to his wealth. Rupert at kōura calls it his retirement. Compounding interest in its simplest form means that you can earn interest/investment gains on the gains that you have already made. 

The more you save, the more money you make on your savings, making the savings even bigger.  It is a great circle you want to be a part of. If 30 years ago you had invested $10,000 in the stock market, you would have earned an average 8% return per annum since then. Today you would have over $217,000. 

The exact same principle applies to your KiwiSaver account.  The more you invest early, the more you will have at retirement. 

 

 

Meet Rachel

Rachel is 30, has just bought her new home and is earning $80,000. She is currently contributing the default rate of 3% to her KiwiSaver but is wondering if she can afford to contribute some more and if her sacrifice now would be worth it in the future. 

As you can see in the table below, with a contribution rate of 3%, Rachel can afford to spend $625 per week in retirement. She is shocked to learn that this would only be 53% of her current take-home income of $1,159!  

The impact of changing contribution rates

 

Contribution Rate

Weekly employee contribution

Expected KiwiSaver Balance (nominal)

Weekly Income in Retirement including NZ Super (real)

 

3%

$46

$591,000

$625 (54% of current income)

 

10%

$154

$1,357,000

$1,024 (97% of current income)

 

However, if she lifts her contribution to 10% and contributes an extra $108 towards her KiwiSaver each week, now this means her retirement income would be close to 97% of what she earns currently and she'd get almost  $400 more to spend per week in retirement.   In our view that's a pretty good trade-off - you sacrifice $108 per week now to gain an extra $400 per week down the track.

 

 

 

 

 

The kōura difference

At kōura, we understand that figuring out your retirement can be complicated - for most of us it is, after all, ages away! This is why before you invest in our portfolios, we give you an indication of what your KiwiSaver might contribute toward your objective. Hopefully, this gives a realistic picture of much you can rely on your KiwiSaver for your retirement. Give kōura a try now and see how your retirement looks

Download Today