$400-a-week shortfall: People in their 40s face a bleak retirement on KiwiSaver’s current trajectory

Dr Ayesha Scott for The Conversation

Cost of living is – and should be – on everyone’s mind. But how we are managing increasing costs could impact us well into retirement.

As cost-of-living pressures continue to increase with record inflation and rising interest rates for mortgages, increasing numbers of New Zealanders are withdrawing money from their KiwiSaver accounts to survive.

According to last September’s Financial Market Authority’s KiwiSaver Annual Report, financial hardship withdrawals were up 42.8% from 2020.

For New Zealanders struggling to survive in 2022, saving for retirement is likely far from their minds.

It is also these New Zealanders for whom safeguarding retirement savings is arguably the most important, as they are less likely to enter retirement owning their home.

Worrying about retirement

The Financial Services Council’s Money & You report gave insight into how many of us are worried about our retirement savings – namely, being able to afford one at all.

Around 64% of Kiwis worry they won’t be able to afford retirement, while 70% think they’ll need to work past age 65.

So while withdrawals, fees and fund switching due to stockmarket volatility are important savings topics, there is one (admittedly unpleasant) question we all need to ask ourselves. Is our KiwiSaver balance building up fast enough to provide for our retirement?

For the average New Zealander, the short answer is no. We are not on track. That’s before we take into consideration the possibility of future financial shocks, like high inflation.

The gap between retirement and reality

The average KiwiSaver balance is $29,022, as of December 31 2021.

This figure is relatively uninformative by itself.

The Retirement Commission (formerly the Commission for Financial Capability) asked actuaries Melville Jessup Weaver (MJW) to dig into the numbers and provide some context, namely to break down the figures by age and gender.

Unsurprisingly, there is a large gender disparity in KiwiSaver funds – another important topic that has received considerable media coverage since it was revealed.

But there is a more general and pressing concern: the limited savings of people in their 40s.

Why this age group? Put simply, these individuals face high household expenditure with kids at home and, if they’re homeowners, increasing interest rates on their mortgage repayments. If they’re paying rent, that’s likely to be going up as well.

This age group also has less time to benefit from KiwiSaver’s compounding returns before retirement and, despite NZ Super being seemingly guaranteed, retirement is far enough away for a little uncertainty to be prudent.

This group was also already in the workforce for KiwiSaver’s inaugural year, with our current 41-year-old aged 27 in 2007.

Calculating a clearer picture

To gain a better understanding of what is facing this cohort, we need to do two things: first, estimate their KiwiSaver balance at age 65 (using Sorted’s KiwiSaver Calculator) and, second, calculate if this will be enough for retirement.

The average KiwiSaver balance for a 40-something is $36,833 ($32,987 for women, $43,068 for men). Assuming the average wage (to be conservative, let’s use figures from 2017) and investment in a balanced fund, a 43-year-old with a current average balance of $33,331 is projected to have $151,820 by 65. For a 48-year-old with current average balance of $40,335 in a balanced fund, Sorted projects $121,350 by 65.

But is this enough?

The New Zealand Retirement Expenditure Guidelines 2021 are the basis of Sorted’s retirement calculator. Our retirement options are “metro” versus “regional” living, and “no-frills” versus “choices” expenditure.

Let’s assume our average Kiwis are city-slickers (“metro”) and hope for a comfortable standard of living with a few luxuries thrown in (a “choices” lifestyle). Those in regional areas and/or planning to live (very) frugally are likely to spend less in retirement.

This calculation does not factor in other income (such as savings outside KiwiSaver, or working past 65) or having a partner, and we’re (optimistically) living until 90 years old.

After the weekly (singles) NZ Super payment of $463 combined with KiwiSaver funds, our 43-year-old is projected to be $392 per week short of the $1,029 they’ll need per week in retirement. Our 48-year-old is projected to be $427 per week short.

Those considering a more frugal lifestyle ($726/week) are still short after NZ Super and KiwiSaver: $89/week for our 43-year-old and $124/week for those currently aged 48.

Save now or work longer

Kiwis are right to think they are not on track to afford their retirement and that they may be working well past retirement age.

Depending on your personal circumstances, you may or may not be the average Kiwi. It doesn’t matter. We all need to cope with today’s cost-of-living pressures while making sure we’re saving enough for tomorrow. On average, what we are doing now isn’t enough.

It didn’t have to be this way.

While we can’t go back in time and introduce KiwiSaver in the early ’90s like Australia, raising the baseline savings rate from 3% would help. This is not a new idea, with the Commission for Financial Capability recommending a graduated increase in 2016.

Unlike our employee-employer contribution mix where New Zealand employers match their employees’ 3%, Australians also enjoy an employer-paid scheme (currently a 10% rate, by 2025 it’ll be 12%). The current average balance for a 40-something Australian is about $125,000.

But what you can do now is take stock of your own financial situation. Regardless of age, you should do the above calculations yourself. Then, do something about it.

Individuals can contribute to KiwiSaver at a higher rate of 4%, 6%, 8% or 10% and choose the best fund type for their circumstances to ensure that money is working for them. Your future retired self will thank you.

Dr Ayesha Scott is a senior lecturer in finance at the Auckland University of Technology.

The Conversation