A recent KiwiSaver survey done by AMP has shown what’s happening to people’s KiwiSaver at 65. The survey found that many people are planning to spend their KiwiSaver money as soon as they are eligible to withdraw it.
The survey found that 15% of people planned to use their funds to pay off their mortgage or other debt, 15% planned to withdraw it and invest elsewhere, 14% planned to withdraw the money and spend it and only 8% planned to keep their money in KiwiSaver. The remaining 48% did not know what they will do.
These results are not surprising. KiwiSaver is still a very young initiative and naturally the focus to date has been on the “accumulation phase”. In other words, are you in KiwiSaver? How much should you contribute? What type of fund are you in?
Very little attention has gone towards what to do when you reach retirement. This is unfortunate because these choices are just as important as the ones you make during your “accumulation phase”.
Workplace Savings NZ found that most people who take out their KiwiSaver at age 65, do so as a lump sum, and as the survey suggests, many people are using their lump sum to make big purchases or to pay off debt.
As KiwiSaver balances grow, the industry will need to develop more attractive products that create an income stream for investors in retirement.
Overseas, annuities are popular. This is where an investor gets a regular income stream after providing a life company with a lump sum. However in NZ they are not popular because:
- They have a tax disadvantage to them
- The annuity will usually cease when the investor dies and the residual balance is not paid to the estate
- Historically their returns have been low
In the US, like NZ, annuities are not that popular. Instead people often elect to use a financial advisor and slowly draw down on their nest-egg leaving the residual to their estate.
The beauty of KiwiSaver is that investors choose what to do with their money in retirement.
Over time the NZ savings industry will have to develop more suitable products so that investors can create a comfortable income stream, grow their capital and pass it on to the next generation should they wish to. Otherwise the industry, the government and the retiree run the risk of wasting years of savings and becoming too reliant on the State for their retirement.