A question we get a lot is whether 3% KiwiSaver contribution is enough to fund retirement. Given the option of contributing between 3% and 10% of your salary to your KiwiSaver fund, it can be tempting to opt for the 3% so you have more cash in hand when your pay comes in. And if you’re on the younger side of 35, retirement likely seems so far off as to be almost mythical.
Of course, if you require most of your pay just to afford essentials such as rent and food, and 3% is all you can afford, then don’t beat yourself up over whether it is enough. You are doing what you can to prepare for your future. But if you have disposable income then read on.
The question of whether 3% contribution is enough is a simple question, however the short (and rather unhelpful) answer is, “It depends – but probably not”. It all hinges on your financial circumstances as a whole; how many working years you have left, whether you have other investments, whether you own your own home freehold at time of retirement, and your retirement lifestyle.
But if I’m 30 or younger, surely 3% will be enough given the many years I have left of my working life?
NZ Funds released an interesting report two years ago focused on the exact question, “Is the Minimum 3% KiwiSaver Contribution Sufficient?” It’s very detailed and lists all the assumptions* that must be made when considering this question. If you don’t want to read the detail, a key takeaway is:
If you started contributing 3% at 30 years old, with a $75,000pa salary, you could have an estimated $600,000 saved at 65 years old. If your retirement lifestyle meant you spent 70% of your previous salary each year, you would have run out of capital by 80 years old.
As the average lifespan for a Kiwi man is a bit over 80 years, and for a Kiwi woman is 83.5 years, there is a good chance you would find yourself without funds in your final years. Whereas if you contributed 5.1% of your income, you wouldn’t run out of funds until 90 years of age.
*The projected balance is based on expected performance of the NZ Funds Lifecycle ‘glidepath’.
How can I estimate my KiwiSaver balance at 65years?
Generate has a useful calculator to give you an idea of what your KiwiSaver balance might be by the time you’re 65. You don’t need to be a customer of Generate, you just need to know your:
- KiwiSaver contribution rate
- KiwiSaver employer contribution rate
- Fund type (e.g. balanced or aggressive)
- Current KiwiSaver balance
Have a look at the assumptions Generate lists below the tool to fully understand how they’ve got to the calculations given.
What about government superannuation? Doesn’t that cover my retirement?
The government superannuation fund (pension) currently provides around $500 a week to eligible people 65 years and over. For exact payment amounts see NZ Super and Veteran’s Pension payment rates.
These payments are no doubt helpful, but they don’t fully fund many people’s retirement requirements. And if you’re retiring decades on from now, there’s no guarantee that this same level of support will be available when you go to retire. Already the Government has flagged that the age of qualifying for superannuation will be raised to 67 years in the coming decades, affecting anyone born after 30 June 1972.
So, how do you budget for retirement?
While there are many variables and unknowns, making a financial plan now based on what is known is still valuable and will put you in a much better position at retirement.
Start by estimating your retirement living costs. If you’re on track to have a freehold home by retirement, great! But don’t forget to budget for home insurance, rates, and maintenance costs to retain the value of your home, a major asset. Then there is the cost of car upkeep and replacement, replacement of whiteware and other household items, and the day-to-day expenses of food and utilities.
Beyond that, are you hoping to travel? Be active with a golf and gym membership? Or become a regular at your local cafes and restaurants?
Get personalised, expert advice
The above steps will give you an idea of how you’re tracking and what you may need, but it’s a very raw estimate. If you wish to get a clearer understanding of what your retirement income will be, get in touch!
We can provide a personalised report that calculates more accurately what your retirement income could be, considering scenarios like when you buy a home, if you upgrade your home, if you sell an investment property or repay your debt, or periods of parental leave.
We can also advise on options such as reverse mortgages if you own your own home in retirement, which can be useful but should be used with care and with full understanding.
At Building on Basics, we’re passionate about educating New Zealanders on how to prepare for retirement. It’s key to ensuring quality of life and independence in later years. Reach out and find out how we can support you prepare for a retirement that allows you to thrive and not just survive.