KiwiSaver has made retirement planning more accessible and streamlined for Kiwis. But many don’t realise that the baseline contribution rate of 3% may not be enough for a comfortable retirement – especially if they’re largely relying on KiwiSaver to fund it.
While 3% is a good start, it’s worth checking if it’s enough for your goals. Here are some key things to know.
How much do you need to save?
When envisioning retirement, it’s challenging to pinpoint an exact figure you might need. But one can start by gauging how much of their current income they’d like to maintain during their golden years.
A popular rule of thumb among financial experts is the 70-100% guideline. This suggests that to maintain your current lifestyle in retirement, you’d need an income replacing 70-100% of your pre-retirement earnings each year. If you’ve got grand plans that involve significant expenses like frequent travels or anticipate heavy costs like medical bills or rent, you’d aim higher, closer to, or even beyond 100%. On the other hand, if you’re on track to enter retirement mortgage-free and you dream of a quiet retirement, you may look at replacing less.
The difference a higher contribution rate can make
Curious about what a percentage point or two can do for your retirement savings? The Sorted’s KiwiSaver calculator is a great place to start. Though times are tight, with housing and daily expenses soaring, those who can afford to increase their contribution rate now will likely benefit later.
Just for illustration purposes, let’s consider this scenario: John, aged 30, earning $65,000 annually, and contributing the standard 3% to their KiwiSaver growth fund (with their employer also matching at 3%).
Here’s how much more John would save if he raised his contribution rate:
| Contribution rate | Weekly contribution amount | Total by age 65 (estimated) | Projected weekly income until age 85 |
| 3% | $37.5 | $244,674 | $272 |
| 4% | $50 | $288,485 | $321 |
| 6% | $75 | $376,106 | $418 |
| 8% | $100 | $463,728 | $516 |
| 10% | $125 | $551,349 | $613 |
Source: Sorted’s KiwiSaver calculator. For the weekly contribution amount, www.paye.net.nz/calculator/
As you can see, even increasing weekly contributions by about $40 can lead to a difference of more than $100,000 down the line. Can you afford to give your future a boost?
The power of compounding returns
When you invest money, and it earns returns, then those returns also earn returns, creating a snowball effect that amplifies your savings over time. This is the power of compounding returns. So, even if you feel that raising your contribution by just a small fraction isn’t much, thanks to compounding returns, those “small” contributions can grow into sizeable amounts over decades.
Time to shape your contribution strategy?
Of course, though the numbers present a compelling argument for ramping up contributions, it’s crucial to align these figures with your unique financial landscape. Every individual’s economic journey and goals differ. Balance is the keyword here: while it’s great to prepare for the future, it’s also important to ensure that your current budget allows it.
Like to talk about it? Get in touch. We’re here to help.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
