How much to contribute?
Increasing KiwiSaver Default Contribution Could Boost Retirement Savings by $100k
Proposed changes to KiwiSaver, including raising the default contribution rate from 3 percent to 4 percent, could significantly enhance retirement savings for New Zealanders. According to Retirement Commissioner Jane Wrightson, this adjustment, matched by employers, might add up to $100,000 to the accounts of median-income earners by the time they retire.
KiwiSaver balances across all age groups are currently lower than expected after nearly two decades of the scheme's operation, emphasizing the need for reforms.
For instance, a 20-year-old entering KiwiSaver with an annual income of $65,000, contributing 3 percent (matched by their employer), could expect around $300,000 at age 65, as estimated by Sorted's calculator. However, increasing the contribution to 4 percent each from both the employee and employer could potentially grow this sum to $400,000.
Aside from contribution rate adjustments, Wrightson and the Retirement Commission have suggested several other strategies to maximize KiwiSaver returns:
Choosing the Right Fund Type: Selecting an appropriate fund type tailored to one's risk tolerance and time horizon can significantly impact investment outcomes. For example, switching from a balanced fund to a growth fund could potentially increase retirement savings by an additional $80,000 for our hypothetical 20-year-old.
Evaluating Fees and Returns: Understanding the fees charged by KiwiSaver providers and comparing after-fee returns is crucial for optimizing long-term investment gains. Active management typically incurs higher fees compared to passive strategies, but may yield better returns over time.
Considering First-Home Withdrawals: While KiwiSaver can be used for a first-home purchase, withdrawing funds prematurely can affect retirement savings. For instance, withdrawing savings for a deposit could reduce the final balance at age 65, highlighting the need for careful planning around withdrawals.
Making Voluntary Contributions: Regular voluntary contributions, even during periods of reduced income or self-employment, can significantly bolster KiwiSaver balances. Maintaining contributions to qualify for the government's $521 member tax credit annually is advisable, as it ensures steady progress towards retirement goals.
These proposed changes aim to empower KiwiSaver participants to achieve better financial outcomes over their investing lifetimes. As discussions around KiwiSaver reforms continue, understanding these strategies can help individuals make informed decisions to secure their financial futures. This if for information purposes only and should you wish to discuss Kiwisaver options we will refer you to a contact with Level 5 Investment advice qualifications.
