The biggest loss to your KiwiSaver that no one is talking about - and what you can do about it
By Michael Craig – Financial Adviser
What is the biggest risk of loss to your KiwiSaver, that does not get talked about?
Mr DUX is a 25 year old earning $60,000, contributing to KiwiSaver. He has read the forums and news articles on picking a growth fund an selected one with an expected return of 7.4%. He read the outcomes from the Massey Study on Retirement Income Needs for a Choices Lifestyle and is projected to have a good retirement income because he has decided to increase his contributions from 3% to 10%.
Like everyone, increasing costs has put a bit of a dampener on some fun activities. But Mr DUX feels it's important to make the sacrifice now and reap the rewards of compounding interest over his working lifetime. Giving himself a tidy nest egg of $1,857,183 in future value for retirement.
It is a smart thing to do – with these tweaks Mr DUX has increased his potential retirement income with NZ Super from $37,119 to $74,319 (in today’s dollars - if he retires at age 65 and spends at that rate to age 90 with a conservative real return of 3% in retirement).
But what happens if Mr DUX is disabled, can't work, and his income stops?!
Well he can go get a government emergency benefit of course. Mr DUX would get $353.46 per week or $18,379.92 per year.
This is 37% of his current income. This presents Mr DUX with a dilemma. If he can't work due to an illness, all of his sacrifice and hard work will all be undone. The cost of living crisis has already made things tough without cutting his income down to 37%.
Or if he is severely or permanently disabled then he could qualify for $402.84 per week or $20,947.68 per year. This bumps him up to 42% of his pre-disability income.
However, in either case he would need to make some drastic lifestyle changes immediately, while unwell, just to keep the wolves from the door. And it gets worse, the biggest loss of all, the dream of a nice retirement - that $1.8 Million nest egg - is now up in smoke!
But Michael, what about this insurance thing that people talk about? And isn't it expensive and a waste of money?
Great point! Mr DUX could buy income protection insurance that would pay from when he is disabled until age 65.
· There is usually a wait period starting at 4 weeks before he will start getting paid. Some sick leave and holiday pay will help him get through until then.
· Once he is disabled for 4 weeks, he will get a benefit paying 75% of his income until he returns to work or reaches age 65.
What if Mr DUX bought two extra options?
· a KiwiSaver top up of 6%, and
· a boost to the payment of one third when totally and permanently disabled.
The extra third increases Mr DUX’s benefit of 75% by 25% to 100% of his income. This and the KiwiSaver top up mean he can continue to pay into his KiwiSaver at the rate he was when he was working covering his loss and keeping him on track for his planned retirement.
The cost to get this insurance for Mr DUX is $23.34 per week or $1,213.52 for the year (August 2024 pricing). When compared to Mr DUX's after tax income it is 2.46%. That is 2.46% of his income to cover him when he is disabled and can't work.
Speaking of tax, since the benefit is taxable income the Inland Revenue Department say the cost of the income protection can be claimed as a taxable expense. This should mean a tax refund of $383.48. Dropping the cost to 1.71% of his after-tax income.
What this means for Mr DUX is he has a dilemma:
He can keep 100% of his income - and when he is disabled and can't work be left with 37% and some tough decisions.
Or
He can keep 98.29% of his income - and have the certainty 75% will keep coming in the shorter term and 100% when things are really bad.
Yes, it may feel like it is a waste of money to Mr DUX when he doesn't claim on it. But it will be the best money ever spent when he needs to use it.
One of our greatest secrets is we all hate paying for our insurance. And shhh, don't let the insurers know this: we actively help people get rid of their insurance.
How do we do this? Keep an eye out for my next article where I'll share some secrets that insurers don’t tell you about how to reduce your premiums.
Or if you can't wait - get in touch and we can get started today.