Ready for a pleasant surprise? You might be on your way to accumulating a significantly larger KiwiSaver nest egg than your current projections suggest!
When your KiwiSaver provider sends you their annual statement, it offers a glimpse into your future savings, estimating your lump sum at age 65 and what that translates to weekly. These figures are based on government-set assumptions about investment returns.
Online calculators also use these assumptions. But here's where it gets interesting: many KiwiSaver funds have been outperforming these projections, sometimes by a considerable margin.
The government mandates specific return assumptions based on fund types:
- Conservative funds: 2.5% annually after fees and tax.
- Balanced funds: 3.5%.
- Growth funds: 4.5%.
- Aggressive funds: 5.5%.
Greg Bunkall from Morningstar points out that the growth fund benchmark has delivered an average of 8.8% per year over the past decade, before accounting for inflation. Rupert Carlyon of Koura Wealth adds that taxes can reduce returns by approximately 1%.
"I guess it is important to point out that the last 10 years has delivered market returns of about 14 percent in New Zealand dollar terms, compared to a longer-term average of 9 percent. Blackrock are estimating equity returns for the next 10 years to be in the range of 5 percent to 6 percent. After adjusting for fees and tax, you are well below the 5.5 percent assumption currently used for a growth fund."
This raises a critical point: Are the current assumptions too conservative? The Financial Markets Authority (FMA) may be erring on the side of caution, which is arguably a responsible approach. It's better to slightly overestimate savings than to fall short. However, this could also lead people to save more than necessary, potentially making their financial goals seem harder to achieve.
Mike Taylor from Pie Funds suggests that growth funds might realistically expect 6% returns, and aggressive funds, even 8%. Dean Anderson from Kernel emphasizes the importance of standardized assumptions to prevent misleading marketing. However, he acknowledges that the current assumptions might be understated.
But here's a thought-provoking question: Should the government update these return assumptions to reflect current market performance? Danielle McKenzie from the Ministry of Business, Innovation, and Employment confirms that the regulatory formula is due for review, although there's no set timeframe.
What do you think? Are the current KiwiSaver return assumptions too conservative, or do you believe they strike the right balance? Share your thoughts in the comments below!
