Sep 18 2024
The unsolved KiwiSaver challenge: managing retirement savings post-65
This article first appeared in The Post’s online edition, here.
OPINION: Shout out to KiwiSaver. Now well into its teens, our pre-eminent retirement savings scheme has amassed almost$112 billion in funds under management for its 3.3 million-plus members.
Human nature means most people won’t save for a distant goal unless they’re made (or strongly encouraged) to. KiwiSaver architects understood this and developed the model to suit.
So, why haven’t we applied the same thinking to life after KiwiSaver? We’re showered with superb education and guidance on how and why to save for retirement, plus a smorgasbord of product options. Yet, once you turn 65, you’re handed the keys to your KiwiSaver castle and largely left to your own devices. It makes no sense.
If we need dedicated infrastructure and support to save for retirement, surely, we need the same things to help us generate a20-to-30-year income from those savings when we eventually retire?
NZ Superannuation is an excellent benefit. But it provides retirees with a subsistence income only - and it sometimes struggles to do that. Anyone who wants a comfortable retirement with choices about how they spend their time and money must supplement their income by drawing from their savings.
The trick is calculating how much you can withdraw and when, so you have enough to support your lifestyle but not so much you run out too soon. Easier said than done. Primarily because no one knows how long they’ll need their money to last. That’s why financial guru and Nobel Prize winner William Sharpe has called retirement income planning “the nastiest, hardest problem in finance”.
Yet, we expect people to try to solve this puzzle for themselves, leading many to either overspend in the early days or fret and spend too little. Either way, it adds up to a stressful retirement. And it’s only going to become more pressing as our population ages.
It doesn’t have to be this way.
As Professor Andrew Coleman points out in a recent series of insightful articles on New Zealand’s superannuation system, there are almost no providers of annuity-based retirement incomes in New Zealand (an annuity is a type of insurance product where someone pays a lump sum in exchange for a guaranteed income for life). He notes this a major difference between New Zealand and its OECD peers – people in the UK have been able to buy annuities since the 18th century.
The late Sir Michael Cullen, the powerhouse behind KiwiSaver, was passionate about creating a bridge from saving to spending in retirement. In fact, that was part of his vision for KiwiSaver from the outset. Adding an annuity element to the super fund is another option mooted from time to time.
Perhaps the simplest approach is to leverage the KiwiSaver brand with “post-work” products for those nearing or in retirement that focus on paying customers a stable, long-term income to supplement New Zealand Super. Decumulation (or drawdown) funds exist but are not yet a widely understood part of the wider retirement saving lexicon.
Having savings to live off when you retire is KiwiSaver’s entire point. Instead of tinkering with existing settings like allowing more avenues for early withdrawal or multiple providers, we should focus our resources on products and innovations that would make life measurably better for our KiwiSaver graduates.