An Innie, or an Outie?

To opt in, or not to opt in; that is the question.
Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous fortune,
Or to give up against a sea of troubles and trust the government to do it for you.

But I digress. As I have changed jobs I need to decide whether to opt in to Kiwi Saver, New Zealand’s government funded retirement savings scheme.

The key idea is reasonably simple.

  • The IRD deducts around 4% of your gross pay, which goes into a special retirement savings account.
  • Your employer matches this.
  • To kick start the fund, the government provides an additional $1000 as an enticing sweetener.
  • The money is invested by a finance company of your choice, and you will be able to enjoy the proceeds once you retire.

While on paper Kiwi Saver seems like a good idea; I mean, I’m getting a lot of bonus money, that would otherwise be going straight to the government, I feel uneasy about trusting them (or some other financial institution) with my retirement some 35 years from now.

Of course, as with most things the question of whether one should opt it in is more complex. Unfortunately most online resources seem to offer biased advice, and what is on offer is dumbed down with frustratingly little technical content.

Disclaimer: The following is based on cyber research, and an excel spreadsheet. I’m pretty sure it’s accurate, but I may still have overlooked some things.

On deciding on whether I should opt in, I had the following questions:

How much is deducted?

Between 4 and 8% of your pre-tax income. The default is 4%. So if you earned $100,000 with Kiwi Saver your take home pay would be $96,000 less tax.

If I opt out, is it reasonable to ask my employer for the equivalent in a pay-rise instead?

Er, no. There is a complicated formula involved, because the government likes complexity. But basically it means that your employer can apply for a tax credit for most of the contribution they match for you.

What if they raise the retirement age to 75?

I guess you have to work another 10 years. Actually I believe this is a very real possibility. Over the last 10 years the retirement age has crept up from 60 to 65. And, if at 72, the disabled war vet Senator John McCain can run for president, he serves as a great argument for the government to continue to up the retirement age well into the 7th decile.

What happens when I die?

Your Kiwi Saver account is paid to your estate. From what I can gather it is treated like a savings account, and once you die any money left (regardless of how much you have been drawing from it, if any) is paid out in full as specified in your will.

If I change my mind what happens?

You have 90 days to opt out when changing jobs. After that you have no further chances on changing your mind. Choose wisely.

If my lifestyle changes and I face early involuntary retirement or other misadventure, can I apply to access it early?

All text seems vague on this. I believe that if I’m diagnosed with terminal cancer and only have a couple of years, or less to live, then yes I theoretically can apply to have my fund paid out early. However, in that situation, spending months writing letters to the state to try and convince them of this seems like the last thing I’d really want to be doing.

What if I live to 127? (Hey, my last grandmother died at 96 and she was overweight, smoked, drank, and lived on a fatty meaty diet. I’m sure I can do better.)

No firm answer on this. I believe if you run out of money, you’re rooted. If not, what motivation would there be to contribute in the first place?

What if I have a mortgage? Aren’t I financially better off directing any spare money to paying off the mortgage?

Not really.

Let’s assume I’m earning $100,000 (I’m not). On that salary I would be paying $30,360 in tax with the current taxation scheme, leaving me with $69,640 net, or $1339 per week.

If I opt in to Kiwi Saver, 4% of my gross pre-tax income is deducted. So from $100,000 $4,000 is deducted and goes to my Kiwi Saver account, leaving me with $96,000. From $96,000, I pay $28,800 in tax, leaving me with $67,200 or $1292 per week.

So the bottom line is Kiwi Saver would cost me $47 per week. However, because it is taken pre-tax, I’m effectively putting $77 per week towards it (4000 / 52), which my employer matches.

So at a cost to me of $47 per week, Kiwi Saver gives me $154 per week into my retirement savings account, plus interest. That’s a pretty good investment.

Now what if instead of paying $47 per week to Kiwi Saver, I opt instead to put that money towards my mortgage.

Let’s assume I have a $500,000 mortgage over 25 years at 10% interest. My weekly payments are $1,047. Over the 25 years I will have paid $865,000 in interest. If I increase my weekly installments to $1100, I will pay off the mortgage in 21 years and save a total of $171,000 in interest.

However, with compounding interest (assuming 5%) the $154 per-week that goes into Kiwi Saver would be worth $760,000 after 25 years  having effectively paid in approximately $85,000 (at $47 per week).

(Note, from comments this is a typo and should read 760,000 after 35 years, or 404,694  over 25 years) ,

Even after taking into account the projected tax-cuts, there is still a very strong financial incentive to opt in.

How can I really be sure that the policies that apply to Kiwi Saver now will still be applicable in 40 years? With the government changing every three years, what guarantee do I have that some future government might not squander my savings?

We have no guarantees, except that a government would likely be committing political suicide by making any such sweeping changes. However, much like the labour government’s phillia for new taxes, changes can be introduced gradually, particularly if the economy takes a turn for the worse.

Should I really be relying on the government to fund my retirement? The US may face financial collapse, there’s an impending food crisis, we’re running out of oil, global warming may reak devastation on much of the world’s eco-systems, and Reuters keeps muttering about avian flue. Is it not better to invest all my spare money accumulated during my working life in money-making assets, such as property, or business?

That depends on how pessimistic you are. Yes, within our life-time oil will become a scarce resource. Without doubt this will reduce the world’s global GDP, which in turn will have depressing effects on the economy. It may be better to direct all your available resources to becoming completely independent, and self-reliant.

But, when I mention things like that people usually start looking at me strangely.

All things considered I’ve decided to opt out for now, pay off my mortgage as quickly as possible, and in the next few years start investing in (semi) rural property*.


*And possibly get a gun license

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5 Responses to An Innie, or an Outie?

  1. Ian says:

    “You have 90 days to opt out when changing jobs. After that you have no further chances on changing your mind. Choose wisely.”

    Not /entirely/ true… you are correct in that you must stay enrolled in kiwisaver once you’ve joined, howver there is the option of taking a ‘contribution holiday’, which can be up to 5 years, and you can take unlimited contribution holidays back to back.

    So while you are technically enrolled, neither you or the govt are actually paying any money into it during such a holiday.

  2. Glen says:

    Hmmm, interesting figures. I can’t decide either, so at the moment, am not enrolled in it. What worries me, is that what if I want to retire before then. It should not be locked, oh, and I don’t trust investment companies, the investment really should be secured / government guaranteed. Right now, they could lose it all.

  3. David says:

    National’s industrial relations spokeswoman, Ms Wilkinson was forced to retract comments made earlier today suggesting National would do away with the compulsory employer contribution.

    http://stuff.co.nz/4562013a10.html

  4. Glen says:

    Just checked. I think your figure on how much you save is not the same as I calculate it.

    “However, with compounding interest (assuming 5%) the $154 per-week that goes into Kiwi Saver would be worth $760,00 after 25 years, having effectively paid in approximately $85,000 (at $47 per week).”

    I think this is actually $404,694 total value.. and once you account for inflation: $394,878, based on a total input of $154 per week, and $1000 starting bonus, and 5% interest.

  5. michelle says:

    @Glen: Indeed you are right. Typo at my end. The comparison I was making was with interest paid on a 25 year mortgage, against, money invested over 35 years in Kiwi Saver.

    I also don’t take into account:
    * Tax paid of interest. Net interest would probably be less than 5%.
    * Instead using your Kiwi Saver payments to pay off the mortgage, means you pay it off several years sooner, and then have additional investing time.

    Nonetheless it would still appear KS is a better investment on paper although these calculations are based on very favourable conditions.

    Still, it makes me uneasy. And the fact that mutterings from the likely new government in an election year about drastically changing the scheme doesn’t help to instill much confidence.

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