New savings rules comes with big bucks attached
From 1 April 2019 the KiwiSaver contribution rate you can choose from could be any of 3%, 4%, 6%, 8% or 10% of your salary/wages. Currently you have only three contribution rate options: 3%, 4% and 8%.
When put in percentage terms, an addition of a 6% and a 10% contribution tier does not look dramatic. But, how about if you happen to be one of those sharp savers able to stash away that little bit more for retirement? The impact of raising your contribution rate to one of these new tiers can put hundreds of thousands of additional dollars into your retirement account by the time you hit that age. Here’s how.
Raking in the dollars
Amanda is 28 years old and has been contributing to her KiwiSaver account over the past 5 years. She has saved up about $25,000 in her KiwiSaver account. She has chosen a contribution rate of 4% of her $60,000 salary. Her employer tips in the minimum 3% into her account. With everything else remaining the same Amanda will have $682,000 to enjoy in her retirement years.
With good timing she has just been given a promotion at work with a bump up in her salary which is now $70,000. If she made no changes to her KiwiSaver contribution rate, she will go on to save $755,000 by retirement. This is because her contribution in dollars has gone up. 4% of $70,000 vs. 4% of 60,000.
Instead, Amanda decides to bump up her contribution rate to 6% (one of the new tiers). She figures that it is not as much of a financial strain given her increased salary. At 4% she would contribute $2,800 each year. At the higher 6% contribution rate her annual contribution goes up to $4,200 – well within her salary increase of $10,000 (even after tax). Affordable – considering she hasn’t dramatically changed her lifestyle and her expenses haven’t gone up much.
At this higher contribtion rate, with all else remaining the same, Amanda will have about $923,000 when she hits retirement age (currently 65).
Amanda is better off by a massive $168,000 as a result of her decision today to increase her contribution rate!
Where’s the catch?
Yes, agreed you can make a notable difference to your future lifestyle in retirement with small increases in contributions now. But, you have to remember that KiwiSaver in most circumstances, is locked away till you are eligible for retirement. While the rules allow you to access your savings for a first home or at times of financial hardship, these are really rare exceptions.
Any contributions you make over $1,043 a year attracts no additional rebates from the IRD. There aren’t any notable tax benefits from making higher contributions. So, if access to more liquid (or easily accessible) savings is important for you, then choosing a higher contribution rate into KiwiSaver may not be as appealing to you. Check with your financial advisor.