KiwiSaver is almost 20 years old – a milestone worth celebrating as a country facing a potential retirement poverty crisis. This concept probably sounds a little dramatic, I know, but with our ageing population – and a super scheme that is looking less and less sustainable to support it, we need to consider the facts.

KiwiSaver should be a pivotal component of retirement planning for Kiwis and is only going to get more important as the cost-of-living increases and the total tax take available to fund NZ Super decreases.

So, what’s the current state of retirement in New Zealand? Te Ara Ahunga Ora, the Retirement Commission, carried out some research on this very topic in 2024 which painted a worrying picture.

Worrying picture

Their research found that almost 40 per cent of retirees (ie someone 65 or over) are completely reliant on NZ Super for their income, and less than 50 per cent are mortgage-free; 46 per cent of respondents were not financially comfortable, and the same percentage had to decrease their non-essential spending in the last two years.

Even more worrying is the 28 per cent and 26 per cent of respondents who had to buy less food and put off medical treatments due to affordability issues. This doesn’t match our vision of retirement – a time of debt-free living, travel, socialising and reaping the rewards of years of labour, right?

Things aren’t going to get easier when it comes to NZ Super and its ability to support retirees in the future. Our proportion of over 65s is steadily increasing, and our birth rate is declining.

Why is this significant? Because NZ Super is funded by the current working population. And what happens when you have an increasing proportion of retirees versus working people? Less taxes to support all those relying on NZ Super.

In my opinion, and one that’s shared by several people much smarter and wiser than me, something needs to change when it comes to how NZ Super is managed – and KiwiSaver is a big player when it comes to being part of the solution here.

KiwiSaver is a voluntary, opt-out retirement savings scheme classified internationally as a “tier three” initiative, aimed at increasing the income replacement rate in retirement rather than merely preventing poverty (tier one).

Most people invest automatically through employer and employee contributions, although non-salaried workers can contribute directly. And while KiwiSaver may pale next to some international schemes (looking at you, Australia!), it offers significant benefits. A mandated employer match of at least 3 per cent and an annual government contribution of $521.43 for those who are eligible, make the initial ROI extremely attractive. Additionally, its PIE structure provides valuable tax advantages, especially for those in the 30 per cent or higher tax bracket.

Why we need savings

But do we actually need KiwiSaver (or other) retirement savings? The Retirement Expenditure Guidelines Report, released on an annual basis by Massey University’s Financial Education Centre, is a handy resource to understand the gap between NZ Super and what retirees actually spend.

In 2024, this data showed that the average retired household spends more than their NZ Super income – what we call the “retirement income gap”. The gap ranges from $45 per week for a retiree living outside of the city on a “no frills” budget, up to $940 per week for a couple living a “choices lifestyle” (which I certainly want!) in a metro area.

Even on a tight budget in a low-cost area, it’s clear that NZ Super isn’t enough – so we need to understand the important role KiwiSaver and other long-term savings and investments will play in funding retirement.

Sorted.org has two projection tools that can together help you plan your retirement needs, the first being their KiwiSaver calculator and the other being a retirement calculator.

Just using some rough numbers and assumptions: an 18-year-old starting out with zero KiwiSaver balance and a $60,000 initial income, putting the minimum 3 per cent employee contribution with their employer’s 3 per cent match into a high growth fund, could be looking at just over $500,000 balance in retirement. Alongside the NZ Super benefit of around $500 per week, this nest egg will allow them to afford the “choices” lifestyle described by the Massey research.

So, we know that even if NZ Super continues as-is (unlikely in my opinion), KiwiSaver will help plug the retirement gap.

Or, if you plan a bit smarter, potentially even replace the need to rely on a government pension in retirement. But how can we get the best “bang for our buck” with KiwiSaver?

Consider the variables

There are several variables that will affect the outcome here, a major being the benefit of time. Like me, many reading this article won’t have been enrolled in the KiwiSaver scheme since 18, and this means we don’t have a 40-plus year career to take advantage of when it comes to KiwiSaver accumulation. Regardless, the earlier we start (and have more money invested in the markets), the more our money has the potential to grow.

Contribution rates can also play a big factor, and using Sorted.org’s KiwiSaver tool can again come in handy here – just doubling the contribution rate from 3 per cent to 6 per cent alongside the working life calculations I did earlier adds almost $200,000 to the imaginary retirement balance.

This power of higher regular contributions is something not well understood or considered by many Kiwis. Fund types are a third variable that can affect your long-term balance, with (in my opinion) too many Kiwis in lower-risk and consequently lower average return funds, despite having 10-plus year investment horizons.

Fees can also play a big part when it comes to your future KiwiSaver balance, something that I (working for a low-fee fund manager) am passionate about.

But that’s a topic for another day. And something to consider when it comes to ensuring you’re with the right KiwiSaver provider for you, alongside the even more important choices around fund type and contribution rates.

Take control

The crux of it is, we have more control when it comes to KiwiSaver than many think. Optimising how you manage your KiwiSaver during your working life could have a huge impact on your position at retirement, regardless of whether that’s near or far.

While there are a range of investment options to consider when it comes to planning for your retirement, KiwiSaver is a key tool to integrate into your financial planning.

The built-in advantages around employer and government contributions give investors a huge advantage in terms of ROI, and there are many levers you can pull to maximise your projected balance at retirement.

KiwiSaver’s inaccessibility is also handy for avoiding ransacking savings outside of absolute hardship – meaning that it’s a great vehicle for long-term wealth building. So, I highly encourage you, if you’re reading this, to take a moment to review your own KiwiSaver situation, ensure you’re making the most of what’s available to you, and if possible, increasing your own contributions now (not later!) to help secure your financial future.