By Craig Simpson
Sky-rocketing house prices in the major centres has meant more and more Kiwi's are forced to access their KiwiSaver accounts as part of cobbling together enough money for a deposit on their first home.
In August 2016, close to $50 million withdrawn from 2,540 KiwiSaver accounts, so averaging $20,000 per KiwiSaver account in round figures.
By pulling money out of KiwiSaver the future retirement lifestyles of many everyday New Zealanders is being compromised.
For a 30 year old median wage earner in New Zealand, if you have aspirations of owning your own home and saving enough for your retirement, we have some bad news for you. You can't have your cake and eat it too.
Well, at least not if you remain on the median wage throughout your career and at the same time save at least 10% of your wages over your entire working life.
We have been collecting the official Statistics NZ's LEED database median wage numbers as part of our KiwiSaver regular return analysis and have noticed that the median wage is rising gradually but not fast enough to allow every day New Zealanders to get ahead with their retirement savings. See our report of median pay levels here.
The LEED data is used in our regular savings KiwiSaver return model where we have set up a fictitious 28-year old and assumed they joined KiwiSaver back in April 2008. We are trying to model what an average person's experience within KiwiSaver is actually like.
Using our data and making some basic assumptions (outlined below) we estimate the balance of our 28-year old's KiwiSaver when they retire in 2044 is just under $250,000.
- minimum contribution rates into KiwiSaver remain unchanged
- member tax credits cease after 2016
- wages within each age bracket remain where they are today and we apply these to our scenario
- a KiwiSaver fund returns the equivalent of 4% per annum and returns are compounded monthly
- KiwiSaver member fees and other costs are accounted for in the net return
Having saved quarter of a million dollars is a pretty achievable target for a median wage earner we believe, but is it enough to enjoy your retirement and provide you with financial freedom? Probably not, based on current prices and living standards.
The picture gets considerably worse for our model KiwiSaver, when $30,000 is withdrawn for a house deposit after 10-years (i.e. in 2018). Allowing for the withdrawal and a continuation of their savings the balance at retirement falls to $160,000. The $30,000 withdrawal has effectively cost our KiwiSaver $90,000 by the time they retire.
Even so, $160,000 will provide a small supplement to whatever the government may provide, but it won't go that far if you have to draw on your capital and interest rates remain low.
So, what is a young person on a median wage today to do if they want a reasonable lifestyle in retirement and have their own home?
The harsh reality is, if you want a house, you will have to forgo financial freedom in retirement. You will be relying on strong housing markets and low interest rates continuing and being able to access enough capital from your property to fund your retirement. It sounds pretty easy especially in the current environment, but what will it be like over the next 30 to 40 years?
Alternatively, if you want financial freedom in retirement, you will have to save more than just the minimum. For our KiwiSaver person from age 28 to 65, if they up their personal KiwiSaver contributions to 10% it would give them a balance of around $530,000. This would provide a large number of people with a reasonable lifestyle, assuming of course you were topping up what the government gave you.
Unfortunately not many people will have the discipline needed to save this level of their income, or desire to forgo traveling, socialising or having the latest electronic gadget.
I wouldn't want to be a 20 or 30 something today facing these decisions.
39 Comments
Good article Craig. This is a serious problem for young people. If they use their Kiwisaver to buy a house, they could seriously comprise their retirement. Add to that these subsidy schemes artificially pump the price of houses higher, and the whole scheme looks more damaging to NZ than helpful.
More terrible policy around housing from the Nats.
On what basis to you predict a 4% return over 28 years when we are in a descending interest rate environment? A trend that extends back at least that far. Also when a significant portion of one key investment vehicle, government bonds, are trading at zero or negative.
My thinking is that 4% net of tax and fees is fairly conservative and achievable from an aggressive equity based portfolio over the long term. A majority of 30 somethings who are serious about growing their wealth over the long term will be in equities and not bonds or cash.
I believe the same scenario could also apply to those in the larger centres outside Auckland if you are on the median wage and a single person. Even if you bought a NZ median priced home using KiwiSaver, the chances of you also saving enough of the median wage to ensure you had financial freedom in retirement, I think are slim.
Hi Craig,
Sorry why do you assume someone would stop working at 60? Majority of people today would be able to work into their seventies if the retirement age were higher. Given another 30 years of medical advances we're likely to see that continue to increase
Also you're ignoring the potential capital gain on that 30k - someone who withdrew that a year ago and bought an entry level property in Auckland would have already netted well over 100k. Far from costing them 90k it's more likely to make them over $1 million once they leverage it over the next 30 years
Andrew
The data is based on a 28yr old back in 2008 which would make them 65 in 2044/2045. Yes while some may want to work on into their 70's many will not. I take on board your point re medical advances and within the financial planning community the most common time period in retirement is 25years at a minimum (i.e. to age 90 if you retire at 65).
I'm not ignoring the capital gain potential from property, I just don't see it being this extreme over the long term. Even if you make $200K in capital gains over the next 10-15 years you still won't have saved enough alongside KiwiSaver to be able to have financial freedom by my calculations assuming you are only earning the median wage.
Leverage will work in this person's favour in the current environment, but what happens when rates rise and property values fall? It wasn't that long ago we had mortgage rates in the high 8% and 9% range or have we all forgotten about this?
Thanks for the response.
I think 25 years is a very long time to be retired and not many can afford it in the current environment.
Re: capital gains - anyone who bought an entry level property in Auckland even two years ago would be getting close to 200k already. Prices may come down and rates may go up sure but IIRC the stock market took a bigger hit than Auckland property did during the GFC. Globally there seems to have been a rush to invest in property in urban centres ever since.
You've hit the nail on the head, 25 yrs is a long time and many can't afford it. This is the problem everday Kiwis face and especially those on a median wage. I've been fortunate enough to see the issues first hand as an adviser and telling someone they have to die at age 70 because they'll run out of capital is not fun.
Good article Craig, and a very important topic for young people to think about.
Another thing, of course, is timing during the market cycles. Withdrawing equities-based Kiwisaver capital for a deposit during a downturn would be problematic (as those nearing retirement well know), even though house prices might have leveled off, and there's sure to be another 2008-style downturn between now and 2044. Either it will be a flash-crash and subsequent multi-year recovery, or a long recession of some kind with associated lack of inflation.
I've always felt that using Kiwisaver as deposit money is against the principle of it, and just boosts asking prices. Something will have to give at some point, either socially or economically, or both.
Yes something does have to give and I'm not sure which lever is the first one you pull.
One thing that is apparent from this analysis is the median wage is too low. Even as a couple if you are both on median wages with a young family, and a mortgage, you will struggle to get ahead and become financially free.
Craig, different strokes as they say.
Personally beleive that if you don't own your own home at retirement age then you won't be able to afford the power bill!
Any wealthy person has had property ownership rather than renting.
Certainly sleep better with millions of dollars invested in positively geared property than if I had it with a sharebroker
"Any wealthy person has had property ownership rather than renting."
this is correlation, not causation. Perhaps wealthy people tend to be able to afford houses, rather than buying houses make you rich. It's quite possible to become very wealthy without exposure to property, and also quite possible to get exposure to property without the hassle of maintaining your own property, or looking after tenants etc.
The property vs shares argument is long and boring and in an ideal world you'd have both to diversify your risk (as I do), in general property gives a lower return than shares in return for a lower volatility. The biggest difference is how cheap and easy it is to leverage into property, which works out great until it doesn't. An un-leveraged share portfolio is in many ways less risky than a leveraged property.
Kiwisaver has been sabotaged by the national government. It should be fully compulsory by now and totaling about 16% of yearly income. Some will say we can't afford that, but actually we can't afford not to.
(or - we could run a decades long balance of payments deficit and borrow then hope)
Unless you are also proposing a change to the fundamental nature of NZS, the non saver in his old age will be "looked after" by society to exactly the same extent - no more, no less - than will the saver. The only loser from his failure to save, will be himself. As it should be
Maybe the problem is identified in the second to last sentence. Without the self discipline to manage finances and save toward a goal, increasing income will simply become increased spending in pursuit of the Joneses. What are reasonable lifestyle expectations? Yearly overseas holidays? $10,000 weddings? Homes are affordable across New Zealand outside the main centres, with less pressure put on young families to have two full time incomes. But when it comes down to it, many are unwilling to take the path that will meet their longterm goals.
Article seems to miss one major point.
If you own your own home outright when you retire you are instantly saving hundred of dollars a week in rent.
If a house now reduces your costs in the future then surely that is a form of retirement saving in itself. More so given you still have a solid asset that can be sold should you really needs the funds.
Your house is a lifestyle asset not an investment. You are also relying on being able to sell your house when you want to, which is actually a risky strategy. It's ok now while the market is stupidly over-priced in Auckland, but what about when everyone is bailing out when interest rates hit 8% and no-one can afford to buy your place.
It is not a lifestyle asset. Shelter is a basic necessity.
You save for retirement to fund the outgoings you incur without any income. Remove/reduce those outgoings, and you don't have to save as much.
My point being you aren't accounting for rent/on going mortgage payments in retirement. The sooner you get a house (and pay it off) the better financial position you are in when you retire.
Whether you are 65, 85, or 100. You have to live somewhere.
20k may double or even triple over 40 years over a working life. It could even earn 5x and be worth a hundred grand (assuming a great market and no losses).
But if, when you retire you have to go and pay $250 a week in rent, that 100k is gone in less than 8 years. Assume some inflation and in 40 years rent could well be $500. So less than 4 years of benefit.
On the other hand, over 20yrs of retirement that 20k to help buy a house (paid off over 30 years) could save me $260k in outgoing rent (@$250pw) or $520k in outgoings (@$500pw)
That means even if I save $100k less than someone who didn't pull their money out of Kiwisaver. I am still $150k+ better off over 20 years of retirement.
How exactly is that a bad thing?
The issue I have is folk think that buying a house is a retirement savings plan - as you say it is a basic necessity.
If you have a house in retirement you still have commitments to meet from limited cash flow and you are reliant on selling your home to release capital if you haven't saved enough by the time you retire. If I can keep renting but have saved say $1million I can have a roof over my head, no other real commitments and be financially free.
The fact the Govt. changed the rules and allowed Kiwisaver to be withdrawn for housing, was one of the red flags for the housing crisis.
Kiwisaver, was meant to be the 'not all your eggs in one basket' money, your 'rainy day' money, so irrespective of the ups and downs of life, whether it be run away housing prices, runaway spouse, illness etc. that come your non income producing years ie retirement, that inspite of what hand life had dealt you (self inflicted or not) that your last remaining years were happy enough.
AND just as importantly you did not become dependent on the state.
By National changing the ruled to allow Kiwisaver early access, except for a crisis, they have admitted that there is a housing crisis, and bought your today vote and at the expense of your tomorrow security.
And of course it further fueled demand and without the corresponding increase in supply, was another factor in runaway house price increases.
This was all pretty apparent at the time.
My advice to my kids was to not trust the government to administer their retirement savings. That a government could change the rules and or loose the money at their wim.
History seems to have proved me correct with the scheme being watered down and government contributions reduced.
The big redflag for me was having savings you can't access. That will equal opportunities lost. As long as NZ has population growth then land prices will go up.
I would rather invest in a house or a commercial building that returns a rent than collect kiwisaver contributions from government and employer.
My kids have their kiwisaver accounts as a back up plan, hopefully they continue on a path of financial self reliance.
Would the amount they withdraw from Kiwisaver not reduce the interest they pay on their mortgage? 30K less mortgage over 25 years would offset what you lose in Kiwisaver. Tax free as well. And as mentioned above the accommodation savings by not having to rent or pay mortgage after retirement also a bonus and tax free as well.
I've just done a quick calculation based on a $420K vs $450K mortgage and total difference is about 50K. What you miss out on by not keeping funds in KiwiSaver is greater than this sum based on the scenario outlined. And yes, while property movements are tax free (assuming you've held long enough) things can change.
What do you think might happen to property prices if there a capital gains tax was introduced? Would it still stack up? I don't know if it would still stack up.
I think capital gains tax to reduce property prices is pointless. Just an excuse for accountants and lawyers to make money. If it did reduce property prices then there won't be any capital gains therefore no tax. May even be the potential for tax refunds/offsets if prices go backwards. I would prefer a combination of the current bright line tax, stamp duty and vacant/undeveloped land tax and use the revenue generated to build infrastructure and social/affordable housing to reduce the supply side issues we have at the moment.
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