Recent analysis suggests that while higher contribution levels can improve retirement outcomes, they may not be equally suitable for everyone.
Research conducted by the Retirement Income Interest Group of the New Zealand Society of Actuaries examined the potential effects of raising KiwiSaver contributions to 6 per cent. The findings indicate that the ideal contribution rate varies depending on income levels and personal circumstances.
For workers earning the minimum wage, a 6 per cent contribution rate may place unnecessary pressure on household finances. Many lower-income earners face increased expenses. Contributing a larger portion of income to retirement savings could reduce their ability to manage these costs. Some workers in this category may even choose to suspend or reduce their KiwiSaver contributions if rates become too demanding.
Interestingly, the analysis found that minimum-wage earners contributing higher rates could enjoy greater spending power in retirement. While this outcome appears positive, it raises concerns about whether too much financial sacrifice is being required during working years.
For those earning around the median wage, the picture is somewhat different. A 6 per cent contribution rate may be appropriate for individuals who contribute consistently throughout their careers and make use of KiwiSaver funds for a first-home purchase. However, for those who do not withdraw savings for housing, a contribution rate of 5 per cent is more suitable.
Because New Zealand Superannuation represents a smaller proportion of their pre-retirement earnings, many high earners are unlikely to maintain their standard of living in retirement through KiwiSaver alone. Additional voluntary contributions or extending their working lives beyond age 65 may be necessary to achieve their desired retirement income.
The research also highlights the difficulty of defining an adequate retirement income. Individual lifestyles and financial responsibilities differ widely, making a single solution unsuitable for everyone. Instead, retirement planning should be viewed as a personal process.
Overall, the actuarial group continues to support a default KiwiSaver contribution level of 5 per cent. In their view, this strikes a better balance between maintaining financial well-being today and building sufficient savings for the future, particularly for lower and middle-income New Zealanders.
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