If you had $100,000 in KiwiSaver in 2020 and it grew to $130,000 by 2026, you might think you were 30% better off. But prices have also risen by about 30%, meaning your money has barely kept pace with the cost of living.
Even at a modest 2.5% annual inflation rate over decades, something costing $100,000 today would cost about $164,000 in 20 years and $269,000 in 40 years.
One way to counter this is to invest for growth. Balanced, growth and aggressive funds are expected to beat inflation over the long term, but there are no guarantees.
Fund choice matters. Being too conservative when you’re young can mean missing out on long-term growth. Being too aggressive shortly before retirement or a first-home withdrawal can expose you to a major fall just when you need the money. These risks are controllable.
Another risk is not contributing enough to KiwiSaver over your lifetime. People contributing the minimum, matched by employers, right through their working lives should retire with a decent sum in KiwiSaver. But breaks in contributions can leave you with much less at retirement because you lose both new deposits and the investment growth they could have generated. The reality is that there will be times when some people just can’t afford to contribute. But this needs to be avoided.
Fees are another drain on returns, potentially leading to the risk of having less money to spend in retirement. A seemingly small difference in annual fees can add up over 20 to 40 years.
KiwiSaver rules get changed nearly every electoral cycle, which isn’t great for certainty and trust. This can affect how much we save. To feel secure about saving in KiwiSaver, the public needs confidence that the rules will remain reasonably stable over the long term.
There’s also uncertainty over the role of New Zealand Superannuation. I don’t think for a minute that NZ Super is going to disappear. However, if it were heavily means-tested for middle New Zealand, as the age pension is in Australia, KiwiSaver balances could be eaten up by basic living costs rather than supplementing NZ Super as they do now.
Fraud, misconduct and provider failures are risks with any financial investment, and KiwiSaver balances are not explicitly guaranteed by the Government. The good news is that the law requires providers to hold KiwiSaver assets separate from their own business interests. If a provider’s business fails, the investments are ring-fenced and could be transferred to another provider.
It’s never possible to completely rule out the entire KiwiSaver system failing. But if that happened, I’d be more concerned about what was happening to the economy and the wider system it’s based on.
Finally, withdrawing the whole lot at 65 and then falling for a scam is a big risk that some Kiwis fall into.
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