There are a large group of people whose retirement plan is contributing 3% to Kiwisaver and living happily ever after. I hate to stamp on your plans, but Kiwisaver alone is not enough.
The best way to show this is with some fairly typical numbers. We will assume the following:
Tim starts working at age 20 and retires at 65
They contribute 3% of their pre tax income towards Kiwisaver
Their employer contributes 3%
The government contributes their annual contribution
They start off on a pay of $50,000 that increases each year with inflation
Inflation of 3%
Investment returns of 5% after tax and fees
They spend $39,000 per year, increasing with inflation
After 45 years, Tim will have $572,500 in Kiwisaver. Sounds pretty impressive right? And if he were retiring today with expenses of $39,000 per year it would be pretty good.
However, in 45 years the equivalent of $39,000 in annual expenses will now be $147,500. His $572,500 of Kiwisaver funds will barely cover 4 years of retirement.
His pay at age 65 would be $189,000. His Kiwisaver balance is only approximately 3 times his final income and 4 times his expenses. Even if Tim reduces his expenses to bare bones and includes NZ Super income, he still falls well short.
Kiwisaver is a great investment for most people, so don’t get me wrong. But at a 3% contribution it is only one part of a retirement plan. A savings rate of 3%, even if for 45 years, is not going to be enough.
Don’t fall for seeing big projected Kiwisaver numbers in 45 years time. Because your expenses will also increase significantly too. All thanks to inflation. So please don’t underestimate how much you may need for retirement, and conduct the necessary planning.
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