How well can KiwiSaver provide for both a first home and retirement?

COLUMN Deborah Carlyon

Juggling short and long term goals is challenging. In your twenties, having fun, building a career and finding a partner are the priorities, then buying a house and eventually retirement planning.  It’s almost impossible to think about being old when you are young. However, automatic KiwiSaver enrolment forces long-term thinking.

Just how well does saving two or three per cent of your income help? If you withdraw to buy your first home, how will that impact on your retirement goal?
It’s easier to visualise with an example, say $52,000 annual employment income before tax. After five years, you could now have $16,000 to $19,000 in your KiwiSaver fund. The difference depends on what type of fund you were in and how well it performed. 
At this point KiwiSaver is probably becoming more interesting! Why? Because the sums are growing and you can withdraw most of your balance to buy a first home. Specifically, contributions you and your employer made plus fund growth, but you have to leave the government contributions invested. In our example, $6,000 would have to stay allowing withdrawal of $10,000 to $13,000. 
By mid 2012 around 7,440 people had used the first home option with the average withdrawal being $9,640. You have to have been in for three years minimum.
It starts to be meaningful when you consider that a couple could withdraw $20,000 to $26,000. Or a group of friends or siblings could get together to buy a house and be flatmates in their own home instead of a landlord’s house. For such sharing arrangements, make sure you have appropriate legal agreements in place to avoid arguments when someone wants to sell.
If you buy a house for under $300,000, you may also qualify for a subsidy from Housing New Zealand: $1,000 for each year of KiwiSaver membership up to five years. That’s potentially $5,000 each for our couple boosting the deposit to between $30,000 and $36,000.  In Auckland, Wellington and Queenstown, the Housing New Zealand subsidy applies for houses costing up to $400,000 so you’d need to save a bit more to meet usual bank requirements of 10 per cent deposit.

Back to the financial planning: a couple, both 30-years old, buys a house with a $360,000 loan. Repayments will be $2,395 per month for 30 years. I’ve used a rate of 7 per cent because interest rates won’t stay at current low levels forever. If they are earning an average of $50,000 each, deducting tax and KiwiSaver this results in $6,570 per month jointly leaving $4,175 after mortgage repayments. That’s $50,100 per year for living expenses including home ownership costs and life and income protection insurance. 
KiwiSaver contributions will increase to 3 per cent from April 2013 but your employer has to deduct tax from their part now. You will be investing $1,500 per year, your employer $1,050 and the government $520.  So are retirement savings of $3,070 per year enough?
The www.sorted.org.nz website has a simple calculator where you plug in retirement lifestyle expenses and whether you expect NZ Superannuation to still be around. By entering your age, planned retirement age and life expectancy, the calculator works out the money you need by retirement plus required savings each month. Compare your savings target with the total going into KiwiSaver from you, your employer and the Government and you’ll see how close you are. 
Our couple investing $6,140 annually into KiwiSaver (assuming annual increases for inflation) should have $200,000 by age 65 from which they can draw $12,000 per year for twenty years (all the money will be used up). Along with NZ Super, they will have $40,000 per year to spend (in today’s money). There will be variations in earnings over the years through time off for children but also salaries may increase more than inflation allowing higher savings or repaying the mortgage faster. There’s no doubt KiwiSaver is a great base to build on. 
Deborah Carlyon is an Authorised Financial Adviser. This column does not provide personalised advice. Her Disclosure Statement is available on request and free of charge by emailing deborah@stuartcarlyon.co.nz.

You might be interested in reading: Examine your money personality.

This article by Deboarh Carlyon featured Issue 004 of Renovate Magazine. Renovate Magazine is an easy to use resource providing fresh inspiration and motivation at every turn of the page.

 

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