Do you like the life you're living right now?
If the answer is yes, and you want to keep enjoying it even after you stop working, spending some time now to get your finances in order may make that possible for you.
We know it seems far off, but your older self will definitely thank you.
This blog is for all the twenty (and even thirty) somethings out there. Retirement may seem like a distant dream right now, but thinking about it now is so important. Here's why.
The earlier you start saving, the more comfortable your retirement is likely to be.
Right now, you’ve got decades ahead of you to accumulate savings. In that time, your KiwiSaver (NZ's voluntary work-based savings scheme) balance will likely go up and down, but if you keep contributing throughout your working life, you’ll be better able to weather those ebbs and flows.
Take last year, for instance, when KiwiSaver balances dropped significantly. For those about to retire, this may have been concerning, but if you were in KiwiSaver and left your funds untouched in that time you will have noticed they likely bounced back.
With time also comes compounding returns. Any returns you make from your KiwiSaver account remain there for you to earn further returns on in the future. Factor in government contributions and any voluntary contributions you make, over decades you’ll witness a snowballing effect.
Starting early means you won’t need to scrimp and save in the decade before you retire. Think of starting early as an investment in your future wellbeing and lifestyle. It may not impact you right now, but one day, you'll reap the rewards.
Another reason to start early and take advantage of the time you have available is you’ll have a longer retirement to save for.
Stats NZ data indicates that men born in 1995 can expect to live to 74, compared to those born in 1955 who could have expected to live to 68.
Women born in 1995 can expect to live to 79, compared to women born in 1955 who had a life expectancy of 73. That’s an extra 6 years of retirement you can expect to fund.
Those born today can expect to live even longer! These are also just averages, which means many of us will live for longer than these estimates – just another reason why starting to save for retirement early is a good idea.
Now you might be thinking, won’t I get money from the government whether I have KiwiSaver or not?
You'd be right.
NZ Super is a fortnightly payment made to eligible NZ citizens, residents and residence class visa holders aged 65 and older (and this could potentially change by the time you retire). Note that time spent living overseas may impact your eligibility for NZ Super, so it’s worth checking this before assuming that you'll be able to get it.
The current NZ Super rates before tax are:
$506.64 for a single living alone.
$768.92 for a couple (if both of you are eligible).
While NZ Super does help, the New Zealand government encourages us to make additional savings towards our retirement through KiwiSaver. This is because although NZ Super is enough to ensure you can get by, it's unlikely to be enough for a comfortable retirement.
The main reason you should start thinking about retirement early is to set yourself up for a life you love.
Trish Oakley, Head of Summer (Forsyth Barr's KiwiSaver scheme) recommends that you grab some old-fashioned pen and paper and jot some ideas down about what retirement might look like for you.
"The more tangible you can make your retirement, the easier it is to start making it real," she says.
Consider all the things you love doing now – socialising with friends, spending time with family, travelling, going to brunch, shopping, seeing movies, drinking coffee – and how much of these cost money. If you want to continue doing the things you love after you finish working and want to live a comfortable retirement, then starting to save early will make that possible.
Now that we’ve established why it’s a good idea to start thinking about retirement in your twenties, let’s look at how you can set yourself up for a comfortable retirement.
To calculate how much you're likely to need for your retirement, we recommend using Sorted’s Retirement Calculator. This is a good starting point that will help you plan.
Start by using your imagination. Fast forward to when you’re in your sixties or seventies and think about what you’d like your life to look like. After all, to prepare for your retirement, it’s helpful to know what you’re actually planning for.
Some questions to consider:
"When you're 20-something, the future is hard to imagine," says Trish Oakley. However, "the decisions you make today around how much you contribute to your KiwiSaver and which fund you choose can make a huge difference to what you end up with in the future."
If you’re not yet in KiwiSaver, sign up! If you are, spend some time reviewing it to make sure it's working for you.
Who's your KiwiSaver scheme and provider?
Don't know if you're part of a default KiwiSaver scheme? Contact your KiwiSaver provider to find out.
Don't remember which provider you're with? Ask your employer to find out.
What fund type are you in?
Next, spend a little time looking into fund options. If you didn’t change anything when you signed up (prior to 1 December 2021) then you’ve been dropped into a conservative fund, which invests in lower risk assets than balanced or growth funds.
This may not necessarily be the best option for you, so use Sorted’s KiwiSaver Fund Finder, an online tool that compares KiwiSaver funds in terms of fees, services and returns, to help you make a decision.
Your KiwiSaver provider will likely have tools on their website to help you choose from their different options as well.
Be prepared to make changes as you progress through life, too. When you’re young, being in a Growth fund can make more sense as these funds invest in higher risk assets that have a greater tendency to fluctuate (but can generate higher returns in the long term). As you get closer to retirement, it’s a good idea to reduce your risk and change to a Balanced or Conservative fund to protect your savings from big market changes - like what happened to KiwiSaver balances when the coronavirus pandemic hit.
To make this easier, some providers have a tool that automatically selects the best fund for you for your age and changes as you get older. Ask yours if they offer this and consider whether it could be an option for you.
How much are you contributing?
You can also change how much you contribute. The default contribution rate is 3% (matched by a 3% contribution from your employer), but you can change this to 4%, 6%, 8% or 10% to boost your balance by filling out a quick IRD form and handing it to your employer.
Are you making the most of the Government's contribution?
The Government offers an annual contribution of $521.43 if you contribute at least $1042.86 of your own money between 1 July to 30 June each year. This is essentially boosting your retirement savings for free, so it's a good idea to contribute at least enough to get that contribution from them.
How much are you paying in fees?
We all pay fees to our KiwiSaver provider to manage our retirement savings for us, and the fees differ from provider to provider. Fees do add up over time, so it can be worth looking at how much you're paying in fees and whether it's worth it using Sorted's KiwiSaver Fund Finder.
Are you self-employed?
Set up automatic contributions to your KiwiSaver fund to avoid missing out on the benefits, as you won’t have an employer making contributions on your behalf.
Start getting into good habits now and this will set you up well for retirement.
Knowing basic budgeting skills is incredibly helpful, as is knowing how to set up a rainy day fund for emergencies and investing basics. Focussing on your financial wellbeing and building valuable money skills now will mean you’re better able to save for your retirement.
This is something Daniel Callaghan, Head of Risk at the Medical Assurance Society (MAS) emphasises.
"Starting early builds a habit before other commitments, such as mortgage or family, get in the way," he points out. Getting into good habits early also "builds knowledge and confidence in investing. Read everything in the business section and that your KiwiSaver manager sends you - it's a great way to learn without investing anything extra."
Another good financial habit to get into is paying off your debts. While something like a mortgage will take decades for most of us to pay off, there are other debts that don’t take quite so long. It’s a good idea to focus on paying down debt as much as you can before retirement, as you don’t want your hard-earned savings to be going towards paying off credit cards and loans.
Retirement might seem far away, but starting early will make sure yours is as comfortable as possible. After all, who doesn’t want to continue living a life they love?
This information is general information only. It is not intended to constitute financial advice and does not take your individual circumstances and financial situation into account. We encourage you to seek assistance from a trusted financial adviser or other professional advice. The links that are provided or names of third parties are additional resources that you access at your own risk and the FSC takes no responsibility for any third party content. The FSC and its employees make no express or implied representations or give any warranties regarding this information and we accept no responsibility for any loss, damage, cost, or expense (whether direct or indirect) incurred by you as a result of any error, omission, or misrepresentation in this information. 17 May 2021.