Kiwisaver is unlikely to cover the cost of your retirement. But it’s very likely to cover the retirements of Kiwisaver providers, fund managers, bankers, accountants, lawyers, public servants and everyone else connected to the growing Kiwisaver industry.
Before I discuss the specifics of Kiwisaver, I’m going to share with you the basic maths of retirement. Like an economist, I’m going to build a basic model that ignores the real world and makes some simplistic assumptions. I’ll then share with you why this standard model of retirement is extremely risky.
The basic model goes like this:
- You work from age 25 to age 65
- You earn the median income ($560 / week) for that entire period with 4 weeks off.
- You contribute 2% to Kiwisaver with your employer matching that
- The Sorted.org.nz calculator assumptions apply
This is where the fun begins and I can destroy the silly assumptions made by this model, upon which most people are planning their retirements. What is scary is that I chose the median income – 48 weeks a year @ $560 a week. That’s just $27k a year and 50% of the population earn less than that and probably can’t even manage the 2% Kiwisaver contribution.
Furthermore, I am assuming a regular income. There is no option for people who can’t get full time hours or anything more than a string of casualised positions. How will they accumulate any sort of Kiwisaver account balance that can help them in old age?
The next hurdle is the option that Kiwisaver has to withdraw your account balance to put a deposit on a house. Putting aside the reality that buying is almost always a worse idea than renting, how many people who take money out of their Kiwisaver accounts will start their contributions back up again?
Again, once they have sacrificed their retirement on the altar of home ownership, exposing themselves to the risk of negative equity and working as a debt slave for an Australian bank, will they ever be in a position to “save” again?
It’s unlikely. That’s because the standard models forget about something stock standard in the modern New Zealand lifepath. Divorce! Separation! This means that many people will get hit with payouts and recurring monthly obligations (child support, spousal maintenance) that lower their ability to save.
Even if you have accumulated a healthy Kiwisaver account balance, you’ll have to share it with your departing partner. Most of the reading I’ve done around this topic shows that neither partner typically recovers from the cost of separation. They’re both screwed for at least a decade. On the back foot. Struggling.
There’s another massive assumption that the Kiwisaver model doesn’t take into account. That you’ll have employment consistently from 25 to 65! Just ask old guys who have 20+ years of experience in IT and have kept ahead of the curve but can’t find work in their late 40’s / early 50’s how life long employment worked out for them.
With Great Depression 2.0 likely to result in a jobless recovery and future prosperity unlikely to result in marginal workers getting hired to do “make work” stuff any time soon, the Kiwisaver account model of regular contributions has no relationship to how the modern labour market is working out.
The only group of people likely to benefit from Kiwisaver accounts are highly paid public servants. Even professionals who earn partnership income won’t benefit – they need to have access to the cash to cover their upper middle class lifestyle when finance companies go through and their firm writes off a lot of receivables!
I would go so far as to say that if the Kiwisaver model can’t work for a person earning the median (50th percentile remember) income, it is nigh on impossible for it to work for the bottom 50%. And with rising living costs and stagnating incomes, the next few deciles (60th, 70th, 80th) are unlikely to benefit from the model either.
This means that Kiwisaver accounts will cover the retirement only for people who earn really high incomes and would be saving with or without Kiwisaver anyway.They’ve opened accounts for all of their family because they can earn quick 100% return on investment from depositing $1,040 a year for the past few years.
Because of the power of compound interest, little Johnny who gets that Kiwisaver account from birth will end up with a Kiwisaver account like Mitt Romney’s 401(k) by the time he’s eligible to access it.
Kiwisaver accounts are going to be the target of increased lobbying over time. Because they’re going to become a wealth vehicle for high income / high wealth New Zealanders. They’re going to reinforce wealth inequality and make people connected to the Kiwisaver industry extremely wealthy.
Kiwisaver won’t cover your retirement because the fees will eat up most of the returns your account earns. If your fund makes 6% and you’re paying a 1.5% management, trustee and custodial fee along with a 15% performance fee that’s a net 3.6% return before inflation!
6% – (6% * 0.15) – 1.5% = 3.6%
When I read that most Kiwisaver members haven’t changed the default account they were allocated, I despair. If you can find a non-scammy Kiwisaver provider, you still can’t touch the money until you’re 65. Try asking people in genuine financial strife who tried to get money from their Kiwisaver as a last resort. Watch for more complaints around this in the future.
All of this stuff comes back to basic maths. If you want to replace your income in retirement you need to accumulate between 20 and 30 times that amount in liquid or income earning assets.
If you want to replace $50,000 in income that’s at least $1 million in income earning assets. That’s rental property, commercial property, bonds, shares, term deposits, whatever. If you don’t hit that target you have to spend your capital.
When you think about the cost of retirement that way, it’s easy to see how so many people jumped at the high returns offered by finance companies. It’s easy to see how so many people fail to do their due diligence on investment opportunities that finally offer a way out of mathematical impossibility.
But remember folks, this is an affliction mainly suffered by people who have lived above their means. A lot of “boring” people who kept their living expenses reasonable and avoided flashy stuff will be quite happy living off NZ Super and an extra $10k a year from their investments.
Simple living is the simplest way to cover your retirement. But that’s not sexy, and that’s why baby boomers will experience a whole world of pain and adjustment when their post-retirement lifestyles resemble those of the sorts of Kiwis they can’t stand and have discriminated against through the polling booths over the past couple of decades.
Instead of contributing to Kiwisaver, I’m working on small side businesses that will bring in regular but modest income streams. That’s a smarter retirement plan than transferring your hard earned cash to someone whose incentives are completely different to yours.