24 June 2020
To retirement and beyond: KiwiSaver after age 65
Those who had the wisdom to join KiwiSaver when it was introduced in July 2007 will have built up a decent amount in their fund. However, for most people retiring now, KiwiSaver balances will not be enough to ensure them a comfortable retirement. While the next generation will do most of their retirement saving through KiwiSaver, for baby boomers, other savings will be needed to ensure quality of life in retirement.
The question for many retirees is what to do with a KiwiSaver balance that is significant, but not enough.
The original idea behind KiwiSaver was that it was a vehicle for saving towards retirement, providing a lump sum which could be paid out to the investor when they became eligible for withdrawal (typically at age 65). However, over time it became clear that KiwiSaver is also a convenient, low cost way of investing throughout retirement, not just leading up to it.
Now it’s possible for anyone over the age of 65 to join or re-join KiwiSaver. There are many retirees who cashed in their KiwiSaver funds without fully considering the options available to them, and there are some who just never got around to joining. For these people, there is now a reprieve. Since 1 July 2019, being over 65 does not exclude anyone from joining KiwiSaver. However, tax credits are not paid once you’re over 65.
Indeed, more than a third of people aged 65 or more are still working either full time or part time. While it’s not compulsory for employers to continue paying contributions once a member turns 65, many do and as the funds aren’t locked in past age 65, KiwiSaver can be used to add to retirement savings while still having access to the money. These additional payments can be made into KiwiSaver at any time as a lump sum or as a regular contribution and are made directly to your provider rather than through Inland Revenue. For example, some people choose to save their NZ Superannuation payments into KiwiSaver while they’re still working.
KiwiSaver is best used as a diversified portfolio of funds for medium and long-term use. Investment funds are spent gradually over retirement, and most funds will be spent between five and 25 years after retirement. That’s a long investment time frame that requires a higher rate of return than bank deposits will provide.
For those with smaller portfolios, KiwiSaver is a cost-effective investment option. It offers diversification between fixed interest, property and shares along with low fees. Leaving a lump sum in KiwiSaver can be a handy backstop to cover unexpected expenses, such as home maintenance or medical expenses. Small KiwiSaver balances can also be earmarked for specific purposes later in life, such as replacing a car, taking an overseas holiday, or providing financial support and bequests for grandchildren.
Over age 65, withdrawals can be made at any time as a lump sum or as regular amounts used to top up income. Using KiwiSaver in this way has disadvantages, however. As a diversified fund, KiwiSaver is exposed to the volatility of the share market. Making withdrawals when the share market falls means it’s harder for the value of the fund to be restored once the share market recovers. There is also the risk that all funds will be used up before the end of life if the withdrawal rate is not set at the right amount, or if investment returns are not as high as expected. People are living longer - if only we knew how much time we had it would be so much simpler to make our money last until the end! For retirees needing an income top-up, a variable annuity such as the Lifetime Income Fund takes away these risks by providing a guaranteed regular payment for life.
The starting point in deciding what to do with KiwiSaver is to think about how the KiwiSaver funds will be used and when. KiwiSaver performs best as a means of investing a lump sum for a period of at least five years, leaving it largely untouched during that time. If funds are to be spent in the short term, they will be at less risk of volatility in bank deposits. If a regular income top-up is needed, then a variable annuity offers more certainty.
Choosing the right investment option for your KiwiSaver is vital. If you are intending to keep your KiwiSaver funds over the long term, it pays to get advice on which investment option is appropriate for you based on your particular investment time frame.