In Part 2 of our story, we look at how investing a dollar now will help your ‘future self’ when it comes to retirement savings.
Amid the cost-of-living crisis, many people are struggling to meet rent or mortgage payments and pay the bills. Many women say they can’t even think about retirement right now. ‘Like, that’s got to wait.’ ‘Right now, that’s in the too-hard basket.’
Te Ara Ahunga Ora Retirement Commission’s latest state-of-the-nation Money Matters report on its consumer insights programme shows that the ‘squeeze’ on household finances continues.
The proportion of New Zealanders feeling financially uncomfortable remains persistently high at 56%, with 60% of women feeling this way – and women are feeling more financially uncomfortable over time. Also, only 46% of females feel they can manage an unexpected expense.
What would the Retirement Commission’s Policy Lead Dr Michelle Reyers – who has expertise in behavioural and psychological research around financial decision-making – say to women in such tough financial situations? “Look, if you can’t afford it at all right now, you’ve got to look after your current well-being first. But if you can, in a way it’s about thinking about your future self. We’re hardwired to look at current circumstances and current needs, and prioritise them over future needs.”
“Whilst it seems like that’s the right solution in the moment, longer term it’s not. Again it’s about that magic of compounding. So a dollar put in KiwiSaver today is not just going to be a dollar in the future. You’re going to get compounding returns. You get employer and government contributions. It’s free money – a no-brainer.”
“Also, you can reframe the question to consider ‘can I afford not to contribute to KiwiSaver?’ A year spent not contributing to KiwiSaver could cost your future self tens of thousands of dollars.”
Working Out What You Need
If you can’t afford to make KiwiSaver contributions right now, you could start finding out more, so you’re prepared if and when you can contribute. Women need information and tools – and they’re out there.
Michelle suggests you visit sorted.org.nz for resources on KiwiSaver including the KiwiSaver calculator. You plug in the age you’re aiming to start using your KiwiSaver money, how old you are currently, what you earn per year, your KiwiSaver balance, the type of fund (conservative, balanced, growth, aggression, or defensive) you have, and what percentage of your income goes into KiwiSaver.
“Think about which KiwiSaver fund is right for you,” Michelle says. “Have a look at what difference it makes if you’re in a growth fund versus a conservative fund. If you choose a conservative fund because you’re risk averse, you’re actually putting the risk onto your future self because that’s money you won’t have in retirement. Also, look at the fees you’re paying on your account.”
Consider reading KiwiSaver watchdog National Capital’s latest Value for Money report, which scores KiwiSaver funds across criteria that can help you select the right fund for you. The report also notes that the gender savings retirement gap between men and women could reach $61 billion.
Myth Busting Women & Saving Theories
I’ve read that women tend to go for the less growth-oriented, more conservative KiwiSaver funds. But Michelle says that the research shows a more nuanced situation. “It turns out that people with lower KiwiSaver balances are more likely to choose a conservative fund. And, as a woman, you’re more likely to have a low balance.”
“There is generally a view within financial-capability and financial-literacy research that women might be more conservative than men when it comes to choice of investment funds. But I think it boils down more to confidence than to actual [lack of] financial knowledge.”
“A study looked at why men scored higher than women on financial-literacy tests – and the reason turned out to be that the women were more likely than men to choose the ‘don’t know’ option. Men just kind of guessed right. If you take away that ‘don’t know option’, that gender difference falls away because women have to choose an option and will back themselves.”
Michelle says there’s a misconception that women don’t necessarily understand finances as well as men. “Actually, studies show women are much better than men with the day-to-day management of money.”
The Money Matters report also found that more women are talking about money with friends and whānau, and that 36% of women want information to plan their retirement. However, the report also shows that that doesn’t always translate to taking action.
Michelle gets that knowing that you should be doing something doesn’t necessarily make you do it. “I think if you have this looming shadow of ‘I’m not going to have enough money in retirement’, it almost forces you to not do anything, because it seems like too huge a problem to fix. So it’s about making it manageable, and doing the bite-size things. Decide what you’re going to take action on. Set smart goals that are specific and measurable. So, what can you do today? In a week? In a month? In a year? It’s about empowering yourself by educating yourself.”
Seeking Professional Help
What about seeing a financial adviser? Some people shy away from it, sometimes because they see it as too pricey, or because they think it’s something they should do themselves.
“There’s often this aversion,” Michelle says, “to actually paying an expert to help us with our finances. It doesn’t make sense that you wouldn’t get advice about something that’s so important. We get advice from a whole bunch of other things where we don’t have expertise. Generally, you shouldn’t try to fix your own plumbing or your electrics!” Nor should you diagnose yourself rather than going to the doctor.
“It’s not that everybody needs a financial advisor, but it’s not a bad idea to explore that option,” Michelle says. She thinks some people worry that they won’t get the right advice. “But new legislation has come in to regulate the sector. Now, financial advisors need to be registered and need to have certain qualifications. You can complain if you’re not happy with one of them. They also have to be a lot more transparent with how they get paid – so that you know, for instance, if you’re simply paying them an hourly rate, or if they’re going to get a commission for recommending a product.”
There’s some information on sorted.org.nz about getting financial advice. Shop around for an adviser. Check their credentials. Ask questions. Take a support person if you want to.
Working Out Your Saving Schedule
According to the aforementioned Money Matters report, only 26% of New Zealanders have a good idea of what income they’ll need when they retire. Forty-six percent of Kiwi women are actively saving for their retirement. But only 38% of women are confident they’ll be able to have a comfortable retirement (compared to 43% of men).
I recommend using the retirement calculator. You plug in your age, the age you plan to retire, whether you’re single or have a partner, whether or not you live in a main centre, and whether your retirement income goal is ‘no frills’ or ‘choices’. You plug in your estimated KiwiSaver balance at retirement, your partner’s estimated KiwiSaver balance at retirement, other savings, investments, any inheritances, etc.
But not everyone knows what age they want to retire, right? “I think most people don’t know that,” Michelle says. “Because 65 is the age we get NZ superannuation, we’re a bit inclined to think of that as our retirement date. But one benefit of NZ Super is that it’s not means-tested – you can carry on working and you can still get it. So, in the OECD, New Zealand has one of the highest levels of workforce participation over the age of 65. People tend to work til at least 70, some until 75, but then it’s very much down to what your job is – for instance if you’re in a manual job.”
So, just plug your best guess into that calculator. You’ll also need to plug in what age you think you’ll live until…
When Retirement Is Too Confronting
Some people don’t really want to think about retirement, because they don’t want to think about ageing and mortality.
Michelle says that’s natural and common. “Studies have also shown that we can feel disconnected from thinking about retirement because we’re thinking about the here and now. And we often feel disconnected from who we’ll be as an older person, because we don’t want to think about that. Many of us have this disconnect because we see that older person as a stranger.”
She suggests getting an “an age-progression rendering” of your face. Upload a photo onto an app and it shows what you’ll look like when you get older. “This can be a bit sobering,” Michelle says. “But research shows that people who see these visuals of themselves older are actually more likely to make financial decisions that are better for their future selves.”
