KiwiSaver calculators' confusingly differing forecasts

Beware fund managers predicting the future.
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Beware fund managers predicting the future.

Online KiwiSaver calculators exist to show savers how much they might have amassed by the age of 65.

But someone plugging their age, salary and contribution rate into a given number of the KiwiSaver calculators will get as many different "projected" nest eggs.

Take the example of a 27-year-old male earning $50,000, and saving 3 per cent of their before-tax salary, with their employer chipping in another 3 per cent, and $20,000 saved already.

David Boyle from the Commission for Financial Capability says differences in projected KiwiSaver returns are casued by ...
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David Boyle from the Commission for Financial Capability says differences in projected KiwiSaver returns are casued by the "assumptions" behind online calculators.

Westpac's KiwiSaver calculator suggests by age 65, they'd have $252,562 saved, if they went for high-risk, high-return growth funds.

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The same details plugged into ANZ's KiwiSaver calculator yield a figure of $371,000.

The Generate KiwiSaver calculator (which didn't allow a current balance to be entered) spits out a figure of $651,000.

Which figure does a KiwiSaver believe?

David Boyle from the government-funded Commission for Financial Capability says it's variations in the "assumptions" in the algorithms that work the calculators that are responsible for the different projections, though each calculator is attempting to do the same thing: give savers an indication of how much they are going to have saved at age 65, or whenever they choose to retire.

Those assumptions include the rate of return likely to be had after fees and tax, and the level of salary increase savers will get each year. Even small differences can compound up into really different nest egg projections.

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The commission's Sorted KiwiSaver calculator gave a projected nest egg of $254,342.

"We went to an external actuary to give us the long-term assumptions," Boyle said.

That was part of the process of spending taxpayer money carefully, but it means KiwiSavers can use the Sorted calculator to get an "independent" second opinion to compare tp their own provider's projections.

People need to look closely at the assumptions behind calculators to understand the result.

Westpac's calculator assumes a after-tax, after-fee return of 4.6 per cent for a 28 per cent "prescribed investor rate" taxpayer.

Generate, by contrast, does its calculations based on the 7.65 per cent per annum return for growth funds in the five years to the end of June 2016, which was a stellar period of returns for investors.

Generate's small print explaining the assumptions says: "The five year average returns are used for illustrative purposes only, and during this time period there has been a bull market in equities so these returns may be higher than usual."

There's a revolution in KiwiSaver calculators going on.

They are moving from projecting just lump sums, to helping savers set goals, and understand how much extra income on top of NZ Super that they can expect in retirement.

The Future You calculator from Kiwi Wealth, for example, starts with people setting goals.

People choose either a basic, a "flexible" or a "de luxe" retirement, based on figures produced by Massey University.

Only after they have done that do they plug in their salaries and contribution rates.

The calculator then tells them whether they are on track, or off track to get their chosen level of income in retirement.

The $50,000 earner was well off track in his goal to reach a flexible retirement, despite having a projected retirement nest egg of $278,700.

He needed to be saving another $190 a week.

Moves by the government mean KiwiSaver calculators are predicted to get an overhaul.

Commerce minister Jacqui Dean says from next year all KiwiSaver annual statements will have to show projected retirement savings and income figures.

"We want New Zealanders to be able to 'project forward' and understand how their current KiwiSaver contributions are likely to translate into retirement savings," Dean says. 

Between now and then, work will be done on exactly how KiwiSaver providers calculate those projections.

The expectation within the KiwiSaver industry is that a standard methodology will be adopted by all providers, which will flow into KiwiSaver online calculators.

An agreed methodology should create a "neutral" approach so rival KiwiSaver providers don't compete with each other to project the largest amounts at retirement in a bid to attract investors.

The use of KiwiSaver calculators as a marketing weapon is occurring now, though in a different way.

Last week, low-cost index-tracking KiwiSaver scheme Simplicity launched a fees calculator letting people compare how much they paid in fees compared to how much Simplicity would charge.

Simplicity founder Sam Stubbs said consistency of projection methodology would be desirable to stop projections being a marketing tool that could end up giving savers a false belief they are saving enough.

"Some of the assumptions made are outrageous," Stubbs says.

"It (the methodology) has to be realistically conservative because you don't want people getting a false sense of security."

Future projections of returns have been used for marketing purposes in New Zealand before, and the memories are still bitter.

Back in the 1970s and 1980s, insurance companies competed using projections on their "whole of life" insurance policies, which were a mix of investment and insurance, and are no longer sold.

"The projections were criminal," Boyle says. "They weren't anywhere near what people were ever going to get."

Back then, the small print on policies told buyers the projected returns were not guaranteed.

KiwiSaver calculators all contain similar warnings today.

There's something else KiwiSavers need to remember when considering KiwiSaver projections: the future is uncertain.

In 2011, for example, National cut the member tax credit in half. At the stroke of a political pen, KiwiSaver calculators had to be changed. Future projected nest eggs fell overnight, and savers had to increase their savings rate, if they wished to achieve their goals.

KiwiSavers must approach KiwiSaver balance projections critically, and consider whether the amount they are saving will get them to where they want to be in 10, 20 and 30 years' time.

 - Stuff

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