The annual statement you receive from your provider includes an estimate of how much you might have saved by age 65 and what that could mean in weekly income. But these figures are based on conservative assumptions set by the government. The assumptions were made on many funds that have been outperforming for years.
When financial providers calculate those future balances, they must use standard return expectations. Conservative funds are assumed to earn 2.5 per cent a year after fees and tax, balanced funds 3.5 per cent, growth funds 4.5 per cent and aggressive funds 5.5 per cent. These assumptions also underpin online calculators that people often rely on when checking whether they are saving enough.
Actual returns for many funds have been much stronger. Over the past decade, growth fund benchmarks have delivered returns close to 9 per cent a year before inflation. Even after taxes, recent performance has been significantly higher than the official assumptions.
That doesn’t guarantee the trend will continue. experts note that the last 10 years have been exceptionally strong for markets, with New Zealand dollar returns boosted during periods of global market growth. Longer-term averages tend to be lower, and major investment firms expect global share market gains to settle in the coming decade.
Even so, many in the industry believe the official projections lean heavily on the cautious side. Some fund managers argue that long-term expectations for growth or aggressive funds could reasonably be set a bit higher. Others support keeping the assumptions low, saying it prevents providers from competing by promising overly optimistic future balances.
The benefit of a conservative estimate is that savers are less likely to be caught short. They might even end up with a pleasant surprise at retirement if returns continue to exceed expectations. The downside is that extremely low assumptions can also suggest people need to save more than they truly do.
Government officials are aware that the formulas dictating KiwiSaver projections may need updating. The rules are set out in financial market regulations and haven’t been reviewed since they were created. While a review is not currently underway, it may be considered in the future as priorities evolve.
For now, KiwiSaver members should treat their projections as a cautious guide rather than a fixed prediction. If recent returns are any indication, many savers may be tracking better than their annual statements suggest.
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