If you are a kiwi you have the option of making a 115.5% annual return on investment. That is more than the highest ever annual return of the NZX 50. So how can you get that return- more on that later. First, let’s talk about the retirement age.
Here in NZ, the government says the retirement age is 65. It does not mean that you can retire at that age, nor does it mean you are not allowed to work beyond it. It’s an arbitrary age the government has selected. The age when you become eligible to receive national superannuation.
Our average lifetime is increasing. Like many other countries around the world from the increase in healthcare access, improvement in medicine, better food science and technology. So it is more than likely that you will get to the age of 65. (I highlighted around the world because I am so fed up with the flat earth debate. Palm in the face)
Already one in four of us kiwis is over 65. And in future that ratio will increase. 20 years from now the number of people over 65 will double what it is today. Currently, the government is spending 38 million dollars a day to pay for national super. That is going to increase to over 100 million a day if everything stays the same.
OK, so if it is soooo expensive why not increase it the age
The government has been wanting to change the retirement age for a long time. It is the voting youth that is holding it back. They want the same entitlements as their parents and grandparents.
That’s a lot of money!
That is a lot of money for the government to spend on super. The cost is going to explode over the next several decades. So by the time we get to the magic age of 65, the government has more than likely moved the goalpost further away. To 70 years. Or even worse, they have scrapped supper altogether.
The lesson here is that you cannot rely on national super for your retirement plans. And besides, the current super rate is at best about $400 per week in the hand. Or 20k per year.
Stop thinking of it as Retirement age
65 is not a retirement age for everyone, and we need to stop thinking of it as one. It is the age that you are eligible to get NZ super. 65 years is not that old. Heck, my parents are close to that age and they recently climbed Kilimanjaro and hiked Machu Picchu.
So stop thinking of it as a retirement age. If you work hard enough, you can aim for retirement age any age you like, within reason. Just read the shockingly simple maths of early retirement by Mr Money Mustache.
Retirement doesn’t mean you need to stop working, rather it could mean that you only pursue jobs or work that you enjoy. 65 years is an arbitrary age the government has set.
You cannot rely on NZ super for retirement
The lesson here is that you cannot rely on NZ super for your retirement. You can only rely on yourself. The rules of super might change by the time you turn 65.
If you can only rely on yourself, how well are you preparing for retirement? A recent morning news show ran a poll which showed that 61% of their viewers thought that they will not have enough to retire with by the age they are 65.
That is sobering
That survey came on the back of a survey by the Commission for Financial Capability found that over half of kiwis though they are “just treading water” when it comes to their finances.
50% of Kiwis won’t have enough
And it is no wonder. We are not even contributing to our KiwiSaver schemes. Of the 2.7 million kiwi members, half don’t put more than 1000 a year into the scheme. More than half are missing out on their government tax credit.
That is insane, and I will tell you why.
If you are earning a salary of more than $35,000 and are on the 3% plan, then you will deposit $1050 a year into KiwiSaver. Your employer will have to match your input dollar for dollar- less 33% tax. Your employer will deposit a total of $693 into your scheme. On top of that, the government will pay you 50 cents to the dollar up to a max of $520.
In one year your $1050 has increased in value to $2263. That is an annual increase of 115.5%. That is unheard of!!
Kiwisaver + Supper
Let’s work out what that $1050 per year will be worth when you turn 65. Let’s assume you work from 18 to 65 years- that arbitrary 65 years again, your scheme will increase by $2263 per year.
But your scheme will also increase with the rate of return. We will work the numbers with a modest 5% rate of return. I have graphed the results below. To show you the extent of what you are missing out on by not gaining the benefits, you can compare it to the returns of investing $1050 into an index fund, or similar investment, returning 5% per year. Graph below.
If you invest with KiwiSaver by the time you retire you will have $261,059 more than if you invested the $1050 yourself. The value of your KiwiSaver account will be $403,084. That will give you a safe yearly draw of $16,000.
At retirement, you will now have $16000 from Kiwisaver per year, plus the $20,000 from NZ super. A total of around $700 per week.
You could go further, rather than taking a safe draw-down rate. A rate at which is capital in your KiwiSaver will stay there indefinitely. 4% per year should be safe. You could take a reverse mortgage approach. This way, all the capital will be gone by the way you die.
The average life expectancy in NZ is 81 Years, that is 16 years past 65. Let’s work with 95 years to cover our bases and use the reverse mortgage approach. Now how much can you draw per year? Using a simple excel calculator, you could draw down $22,100 until you are 95.
That gives you a total of $44100 to live on when you retire. And all you are doing is saving $1050 each and every year over your entire working life.
Of course, you can speed this up, or have a larger Draw-down once you’re retired, by investing more when you are younger. But that is not what this discussion is about. This is to show you that you need to take advantage of what the government is offering. Rarely do you get Free money.
Rules can change
So you may not be contributing because the rules might change on you. I had the same thought of mind. What if the government changes the age or retirement? And it is a possibility. The KiwiSaver scheme is tied to the NZ super age of 65. And presumably, if the government increases that age, the KiwiSaver age increases too.
Either way, it is still free money. And on average you are going to live to 81.
If you are a kiwi worried about not having enough when you retire you need to act now. Here are a few takeaways you need to follow.
- Contribute a minimum of $1000 per year into your KiwiSaver to gain the tax credit and employs
- Work out how much you need, then tailer you investing to match that
- You should bank on the age of super increasing, so you need to invest for yourself as well
- Aim to invest 3% of your salary into KiwiSaver to gain all the employer-matched contribution
- Look into investing outside of your Kiwisaver
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