New information on how much New Zealanders have in their KiwiSaver should inform policy to help retirees with drawdown.
KiwiSaver was launched in 2007. By international standards, contributions are low. Since 2015 first-time home buyers have been able to take out some funds for a deposit. Withdrawal is possible if in financial hardship. Taxation on KiwiSaver is the same as most other investment funds which are not locked in till age 65.
Given all this, you would expect the first generation of KiwiSaver retirees* to be reaching the age at which they can start drawing down their fund to have modest balances in their KiwiSaver accounts. This article puts some numbers on that, based on innovative work done by the Retirement Income Interest Group (RIIG) of the New Zealand Society of Actuaries (NZSA). I’m a member of RIIG and worked on the two reports published in 2022 on this subject.
I’ve previously written about RIIG’s framework to make drawdown a success. This approach was endorsed by the Retirement Commissioner, and work is now underway to put it into practice and improve guidance on drawdown for retirees.
What RIIG’s analysis was for…and what it wasn’t
When RIIG has presented the results of our analysis to show the size of KiwiSaver balances for the population of near-retirement age, a common reaction has been one or both of:
- It’s shocking people have so little money in their KiwiSaver – what can we do to get people/employers/the government to contribute more?
- Why are you talking about drawdown? Why can’t people in New Zealand buy an annuity like in the US/UK/Canada?
The first question is a valid one for people at young enough ages to make a difference to their KiwiSaver outcomes, but RIIG’s work has been to focus on helping people reaching retirement now or soon. We have to work with the reality: KiwiSaver has helped this generation, but it hasn’t been around long enough to build up to huge amounts. Thankfully, the public pension New Zealand Superannuation (NZS) takes a lot of the strain, being almost universal, not means-tested and available at age 65 (and yes, it can be “afforded”).
The second question can be answered by the history of failed annuity providers in New Zealand and an understanding of the actuarial difficulties (adverse selection, expenses, risk sharing) of selling annuities in a small market with regulated capital requirements. There are now no annuities for sale in New Zealand. Something may come from longevity risk pooling products being tried elsewhere, but in the meantime, there is no option other than drawing down KiwiSaver funds. Again, we work to help people with the reality of retiring now.
Helpful, but modest, balances for the next 20 years at least
RIIG’s analysis of KiwiSaver balances was the first to use individual account data. The sample, from a range of different types of providers, totalled around 40% of the market for ages 45-64.
Analysis showed the cluster and tail distribution of amounts in KiwiSaver at sample date 31 March 2021. That means the majority of KiwiSaver accounts are clustered around fairly low balance amounts, but some have very large balances, so that the average is higher than the median**. This is a key finding. Policy analysis until now has been informed only by the average balance in a fund, within age bands. RIIG’s analysis showed that the balance more representative of most KiwiSavers – the median or middle balance – is a lower figure.
RIIG then took the database of accounts for ages 45-59 years and projected it forward to estimate how much those people might have in their KiwiSaver in future – when it first becomes available for drawdown at age 65.
This is shown in the chart below, for KiwiSaver accounts where the member is currently contributing and continues to do so at the same percentage of salary. Note ages are arranged backwards in order of increasing time to age 65.
The chart shows that there will be some very high balances – the 95th percentiles open a yawning gap to the 75th. But below the 75th the cluster of small balances is evident with the median (50th percentile) struggling to get above $150,000. Most future KiwiSaver balances at age 65 will be helpful, though still fairly modest.
Younger members are expected to have a higher KiwiSaver balance than older members as they will have been able to contribute for more of their working life since 2007. The median balance estimated to accrue by age 65 for current contributing 45-year-olds is $156,900 compared to $72,400 for 59-year-olds.
What this means for drawdown
Drawdown from KiwiSaver is not complicated by factors that exist in many other countries such as tax management (KiwiSaver contributions are taxed on the way in so no tax is payable on the way out), means-testing (KiwiSaver withdrawals have no impact on how much NZS is payable), or multiple product choices (there are no annuities for sale).
But drawdown is difficult enough as it requires unfamiliar choices around letting go of money with few options to make up for mistakes or unexpected events.
Retirees will approach drawdown with varied preferences on whether they want to spend all their KiwiSaver over a few years while they are active, or make it last as long as possible, or leave it all to the kids. Or they don’t know and will wait and see what they need year-to-year.
Given the size of KiwiSaver balances, it is likely many people with little other saving will fall back on NZS at some point in their retirement. NZS remains a crucial foundation of New Zealand retirement income policy. It is also likely that many retirees will not have enough in their KiwiSaver to make it cost-effective to get personal financial advice. This is why generalised drawdown guidance is so important, and where RIIG’s drawdown framework and Rules of Thumb can be used by providers or others to give practical help.
There is a lot of general advice on accumulation. KiwiSaver’s maturity now requires the same for decumulation.
* “Retiree” here means an individual close to or in retirement who may be thinking about how much income to draw down from their retirement fund. KiwiSaver is available to draw down at any time from the 65th birthday, regardless of whether the person is working or not.
** The average is easily calculated using only total value of fund and numbers of accounts. To analyse the full distribution and find the median balance (where half of the balances are above and half below) requires individual account data. The median is a better representation of the typical KiwiSaver than the average which is skewed by some very high balances.