Low interest rates and increasing life expectancies continue to push up the savings nest egg needed for a comfortable retirement. A few simple savings tips can go a long way to help ensure you are prepared. Select the right fund, check your contribution rate, and start early.
Preparing financially for retirement is an important topic, but one that is easy to neglect. Retirement planning always seems less pressing than current priorities and pressures. Thankfully there are some quick and easy steps that KiwiSaver investors can take to materially improve their retirement outcomes.
Selecting the right KiwiSaver fund
Being in the wrong fund could cost the average KiwiSaver investor over $160,000 in retirement. For many investors under 55 a growth fund is likely to be the best fund choice, and the one that maximises their retirement savings. Growth funds typically invest in higher growth asset classes like shares and property and are expected to deliver higher returns over the long term. While these funds are also more volatile, the ups and downs of the market tend to smooth themselves out over the long term.
Let’s take a typical 30 year-old saver with a current KiwiSaver balance of $20,000 and an annual income of $53,000 (the median NZ income). If they contribute 3% of their income to KiwiSaver each year, the difference between being in a growth fund and a conservative fund could be $160,000 in retirement ($334,000 at age 65 instead of $494,000 had they selected a growth fund).
Despite the higher expected returns of growth funds, less than 40% of KiwiSaver members have selected one. Most investors are still in their default fund, or a conservative or balanced fund. Switching to a growth fund can usually be done with one phone call. $160,000 for one phone call sounds like a good deal!
The early bird gets the worm
Savers that start early gain a significant advantage in the world of investment. Compound interest means your money can be put to work for you. And the longer you leave your savings invested, the more it should grow. While it is tempting to push saving for retirement to a later date – the longer you leave it the harder it is to accumulate our desired retirement nest egg.
An average income earner contributing to a KiwiSaver growth fund from age 40 until 65 could be expected to accumulate a KiwiSaver balance of approximately $200,000 by retirement. If the same saver started contributing at age 20 they could accumulate over $425,000 by 65. Starting early makes an enormous difference. Setting up and contributing to your kids’ KiwiSaver accounts can also help them get ahead.
Check your contribution rate
The default KiwiSaver employee contribution rate is 3% of income, with employers contributing another 3% on top. Many employees simply stick with the default contribution rate regardless of changes in their circumstances, but there may be life events that allow savers to increase their contribution without impacting their disposable income. Some investors chose to increase their contribution rates when they receive a pay rise or promotion. Others will increase their contribution rate when they have repaid their mortgage or when their kids have left home. Employees can contribute 3%, 4%, 6%, 8% or 10% of their pay. For the 20-year-old discussed above, adopting a 6% contribution rate instead of 3% would provide another $200,000 in retirement.
We are here to help
Preparing for retirement is an important topic, but is easy to neglect. A few simple steps can make a big difference and could add hundreds of thousands of dollars to your KiwiSaver nest egg. Please get in touch if you want to talk about your KiwiSaver. You can also use our online retirement projector to see the difference that your choice of fund could make and you can make changes to your KiwiSaver account at Fisher Funds Online.