Although many Kiwis aspire to higher quality retirement, they are not on track to achieving it. They are not saving enough, and the small amount that is saved is not being invested for long-term wealth creation, says MrTroy Swann, CEO of Milford Asset Management.
In an article in the New Zealand Herald, he says that despite strong economic conditions New Zealand's household savings rate has actually been negative the past few years.
He says that the government needs to prioritise measures to lift household savings and encourage productive investing. This should include a clear statement on the sustainability of NZ Super, which is a a New Zealand Government savings vehicle to help fund the future cost of universal superannuation.
Mr Swann also says that many Kiwis are already very stretched financially and cannot afford to contribute more to KiwiSaver, a voluntary, work-based savings initiative. The minimum contribution rate is currently 3%.
He said, “A more effective approach is to incentivise people to save more. For example, having KiwiSaver contributions (up to an annual cap) come from your pre-tax income, with any extra contributions not receiving the tax incentive. Another option is to reduce the tax rates on investment earnings in KiwiSaver funds. Therefore, allowing investors' money to grow and compound faster than it does currently. Either option would encourage additional savings and particularly benefit lower and middle-income earners.
“The status quo is not working, as evidenced by the fact anyone earning over NZ$35,000 (US$25,765) per annum currently has no tax incentive to save more than 3% to their KiwiSaver account.”
He also points out that the small amount saved by most Kiwis is being invested too conservatively, in large part because young KiwiSaver members who do not actively choose their fund are defaulted to a conservative fund. Eighty one percent of KiwiSaver members have 10-plus years until retirement, yet just 32% of KiwiSaver money is in growth-oriented funds.
“This is a huge mismatch because growth funds should deliver better returns than conservative funds over longer time periods,” he said.