An average salary earner could have over $1.5 million saved in their KiwiSaver fund by retirement if they start young, invest in a growth fund and put 10 per cent of their income into it.
But the same 25 year old would only have around $408k if they contribute 3 per cent and invest in a conservative fund from the age of 25.
Figures crunched by research firm Canstar reveal how much of a difference it could make to a person’s nest egg by saving at higher contribution rates in the wake of new rates being added to the options on offer.
From April 1 KiwiSaver members were able to choose to save at 6 per cent and 10 per cent of their salary adding to the existing 3 per cent, 4 per cent and 8 per cent options.
Jose George, general manager of Canstar New Zealand, said the key message was to start early and be disciplined.
“It is much harder for someone on $50k to save 10 per cent than someone on $100k. But if you are disciplined and save over time it makes a lot of difference.”
The research showed waiting until the age of 45 to start saving made it much harder to get a large pot of money even for someone on a higher salary.
A 45 year old earning $50K and saving 10 per cent in a growth fund could have around $342,000 while a person earning $100k could have around $598k if they saved 10 per cent in a growth fund.
But a 25 year old earning $100k, saving 10 per cent in a growth fund could boost their pot to around $2.75m.
George said it was the compounding effect of the percentage saved over the long period of time which made all the difference.
“You are far better off starting at 25 years old and stashing some money way than [starting at] 45, even if you are financially stronger.”
But he said saving a higher amount into KiwiSaver also had to be balanced with the fact that the money was locked in until a person reached 65.
Jose said KiwiSaver was also only part of the solution when it came to having a comfortable retirement.
“The caveat to all of this is we are not suggesting KiwiSaver is the only thing to future proof your retirement. It is one of many strategies.”
He said people should pay off high interest debt before increasing contributions to KiwiSaver and aim to pay off their mortgage by retirement.
George also warned that the figures produced by Canstar were not inflation adjusted.
While $1.5 million might sound like a lot in today’s money it would potentially buy a lot less by the time a person reached 65.
“While it looks attractive in today’s money it’s not worth as much. People need to realise even this level of savings is not completely full-proof.”
The calculations are based on returns for the last five years averaged across KiwiSaver providers’ results and past returns are no guarantee of future returns.
The last five years have seen a particularly strong run in the share market and a down-turn is anticipated at some point in the future.
“The challenge we have is since the global financial crisis we haven’t had a down-turn – so we can’t really factor in anything that hasn’t happened yet, but we know will happen.”
They also assume a starting balance of $17,130 – the current average in people’s KiwiSaver accounts, an employer contribution of 3 per cent and that the salary rises at a rate of 2.16 per cent every year.
The good news is that KiwiSaver members should be able to get a much clearer idea of how much they will have saved by age 65 from next year with a change being slated for annual member statements which would mean providers have to tell people how much they could have at 65 and what this would translate to in terms of a weekly amount.
Most providers offer an online calculator which allows people to come up with a figure now but as there is no standardised formula the lump sum amounts can vary widely between the providers.
A spokesman for the Ministry of Business, Innovation and Employment said it was currently finalising the requirements around how KiwiSaver retirement savings and income projections were to be calculated using standardised assumptions.
“These requirements are subject to Cabinet approval. If approved, it’s expected they will be compulsory for the annual statements going out in 2020.”
The spokesman said this would allow time for KiwiSaver providers to make the necessary changes to their systems.
Annual statements come out around May to June each year.
Higher contribution rate
• Most people are currently contributing to KiwiSaver at the 3 per cent rate. To find out ask your employer.
• new options were added from April 1 allowing people to contribute at 6 per cent and 10 per cent, adding to the existing options of 3,4, and 8 per cent.
• To change your contribution level ask your employer if you are employed or talk directly to your provider if you are self-employed.
• You are not locked into a contribution rate and can change it when you want.