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Contribution rates comparisons: What’s your number?

A recent article published in Bloomberg Business news highlighted the increasing contribution rate trends for our American friends on the savings front.

Based on research from Vanguard Group’s How America Saves report, the article states that Americans contributed an average 11.7% of their gross salary into their retirement savings or 401ks as they are better known.

That was broadly on par with 2022 contributions rates, a somewhat surprising figure (to me anyway) given inflation and cost of living crisis there and worldwide.

America has arguably fared better than New Zealand fighting inflation and living there (in many places) is much cheaper than New Zealand.

According to the report, employees alone contributed an estimated average of 7.4% of salary and an “unprecedented number of savers either hiked their contribution rates themselves or had it bumped up through auto-escalation features.”

As far as I’m aware, we don’t have an auto-escalation feature in KiwiSaver but you certainly can instruct your employer to increase your personal contribution rate from the minimum of 3%, to 4,6,8 or 10%. While some employers pay more than the minimum 3% they are few and far behind.

I believe there are a few schemes that adjust your fund type according to lifestages i.e. age which has an impact overtime as well but that is different from contribution rates sliding up over time.

KiwiSavers who are self-employed control their own settings so can make any type of contribution they like, with no minimum or maximum. Most self-employed individuals tend to make the minimum of $1,043 a year, to benefit from the free $541 Government contribution that is offered as a reward for saving.

It is often said, there is no better return on investment given it’s a 50% return. Some may remember that it was once a 100% top-up but that was in the early days of KiwiSaver and was severed by a change from Labour to National not long after KiwiSaver was introduced in 2007.

So how does New Zealand stack up on the contribution front? Pulling the last two years available you can see the breakdown in the chart below.

Concerningly almost half of KiwiSavers are not contributing anything.

Two reasons why this is bad, for them.

They are missing out on free money that would otherwise be contributing to their accounts. And they are missing out on the compounding effect of regular contributions over time to stock up their savings.

Last time I wrote about how disadvantaged we are to Americans, I attracted brickbats for making any comparisons with the Yanks but mainly on the basis that our NZ Superannuation Scheme was gold, untouchable and would be the saving grace for most undersavers. I don’t agree but I do agree there are many fundamental differences between our countries.

Australia may serve as a better proxi for our rates.

The key thing to note, outside of the shocking difference in account balances, is that the contribution rate there is 11% and next July will be 12%. It’s been ongoing debate, among fund managers here and others with an interest in getting our savings rates up, about whether we need to reset the amounts.

Those in favour point to how badly we are lagging and argue that KiwiSaver needs to be made compulsory and higher rates imposed.

Those opposed, suggest social welfare systems and NZ Super are sufficient protections for those perpetual undersavers and those who simply can’t afford to increase contribution rates to KiwiSaver at a time when they are struggling to put food on the table.

With hardship withdrawal applications at an all-time high as well as savings suspensions, on top of inflation, it’s not the best time to argue compulsion in my view.

Side-stepping politics for a moment, I’m a firm believer in taking responsibility for your own destiny.

To that end, reviewing your contribution rates, and assesing your ability to contribute more,  or less depending on your circumstances is what’s important.

To that end, I hope the 401k comparisons and those with our Aussie cousins, serve as a wake-up call for KiwiSaver to take 15 minutes for a pulse check.

Here’s how:

Login to your KiwiSaver account via your provider and check your balance, your contribution rate, your fund type, tax rate and future projections.

If you don’t know who your provider is, contact Inland Revenue or login to MyIR and scroll down to the KiwiSaver section.

Most providers have a built-in calculator that will show you the difference contribution rates will make over time and also different fund types.

Sorted.org.nz also has some excellent resources where you can see more granular information including fee comparisons among providers.

What are you waiting for?

 

 

Contribution Rate
2023 Members
2023 Percentage
2022 Members
2022 Percentage
3%
1,160,363
35.17%
1,069,820
33.82%
4%
329,993
9.99%
337,206
10.66%
6%
107,086
3.24%
93,165
2.95%
8%
117,485
3.56%
130,569
4.12%
10%
92,053
2.79%
87,762
2.77%
No Contribution
1,493,413
45.26%
1,485,829
47.68%

 

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