5 Common Retirement Planning Mistakes New Zealanders Make

Here's the thing about retirement planning: most of us think we're on track until we sit down and actually run the numbers. Then reality hits. Maybe your KiwiSaver balance isn't quite where you thought it'd be. Or you realize NZ Super alone won't cover the lifestyle you're picturing.

The good news? These mistakes are incredibly common, and once you're aware of them, they're fixable. Let's walk through the five biggest retirement planning mistakes New Zealanders make, and more importantly, what you can do about them.

This is probably the most widespread mistake, and it's an easy one to make. When you first signed up for KiwiSaver (or were auto-enrolled), you likely ended up in a default fund. These default funds are typically conservative or balanced investments designed to suit everyone, which means they don't really suit anyone's specific situation.

According to FMA data, hundreds of thousands of Kiwis remain in default funds years after joining. If you're 35 and still in a conservative fund, you're potentially missing out on decades of growth that could significantly boost your retirement balance.

The relationship between time horizon and risk capacity is straightforward: the more years until retirement, the more time you have to weather market ups and downs. Growth funds have historically delivered higher returns over long periods, though they come with more short-term volatility.

But here's where it gets tricky. Switching funds isn't a one-size-fits-all decision. Your investment time horizon, comfort with market fluctuations, other assets you hold, and personal financial situation all matter. This is exactly the kind of decision where speaking with a licensed Financial Advice Provider makes sense. They can assess your complete picture and help you understand which fund type aligns with your circumstances.

Let's talk about NZ Super for a moment. It's a brilliant safety net, one of the few universal pension schemes left in the developed world. But it's designed as a foundation, not the complete picture.

As of 2024, NZ Super provides around $471.20 per week after tax for a single person living alone (about $24,500 annually). For a couple, it's about $724 per week combined (roughly $37,600 annually). Those numbers adjust with inflation, which is good, but they're still pretty modest.

Think about your current lifestyle. Could you maintain it on $24,500 a year? What about travel, hobbies, helping out the grandkids, unexpected home repairs, or healthcare costs? These are the gaps that catch people off guard.

The math is sobering: if you want to spend $60,000 annually in retirement and NZ Super covers $37,600 for a couple, you need to find $22,400 elsewhere, every year. Over a 25-year retirement, that's more than $560,000 you'll need from your own savings (not accounting for investment returns or inflation).

This isn't meant to scare you. It's meant to help you plan realistically. Understanding what NZ Super actually provides is the first step in building a retirement plan that works.

Time is your most powerful retirement planning tool, and it's the one thing you can't get back. The difference between starting at 25 versus 45 isn't just 20 years of contributions. It's 20 years of compound growth, where your returns start earning their own returns.

Here's a simplified example to illustrate the point: if you contribute $3,000 annually from age 25 to 65 (40 years) and earn an average 6% annual return, you'd end up with roughly $464,000. Start the same contributions at age 45, and you'd have around $110,000. Same annual contribution, vastly different outcome.

But what if you're already 45 or 50? Don't panic. Starting late is still infinitely better than not starting at all. You just need to be realistic about catch-up strategies, which might include contributing more than the minimum 3% to KiwiSaver, building savings outside KiwiSaver, or adjusting your retirement timeline.

Many Kiwis stick with the minimum 3% employee contribution to KiwiSaver. That's fine when you're starting out or managing tight budgets, but as your income grows, consider increasing your contribution rate. Every extra 1% you contribute gets matched by your employer (up to their minimum 3%), plus it reduces your taxable income.

For self-employed Kiwis, the challenge is different. Without automatic employer contributions, it's entirely up to you to fund your KiwiSaver, making it easy to deprioritize when business is slow or expenses are high.

New Zealand's public healthcare system is fantastic, but it doesn't cover everything, and wait times can be long for non-urgent procedures. As you age, healthcare becomes a bigger part of your budget, whether through private health insurance, dental work, specialists, prescription costs, or mobility aids.

Many people drop private health insurance as they near retirement, thinking they'll rely entirely on the public system. That can work, but it's worth understanding what you're giving up: faster access to specialists, choice of surgeon and timing for elective procedures, private hospital rooms, and coverage for things like dental and optical that aren't covered publicly.

The flip side? Private health insurance premiums increase significantly as you age, and pre-existing conditions can make it expensive or impossible to get coverage if you've let it lapse. According to research from consumer advocacy groups, premiums can easily reach $3,000 to $5,000 annually for individuals in their 60s.

There's also the question of rest home or aged care costs. While some costs are subsidized, residential care subsidies are asset and income tested. If you own your home or have significant savings, you may need to fund care yourself, at least initially. Care costs vary widely but can range from $1,000 to $2,500+ per week depending on the level of care needed.

Thinking about healthcare planning for retirement isn't fun, but it's necessary. These costs won't disappear just because you haven't budgeted for them.

Here's a mistake that doesn't get enough attention: failing to think about how taxes affect your retirement income. Many New Zealanders assume that because they're no longer working, they won't pay much tax. That's not quite how it works.

NZ Super is taxable income. So is any income from investments, rental properties, or part-time work. Depending on your total income, you could be paying tax at the 17.5%, 30%, 33%, or even 39% marginal rate (the 39% rate applies to income over $180,000 as of 2024, per IRD guidelines).

This is where PIE funds (Portfolio Investment Entities) become relevant. KiwiSaver funds are PIE funds, which means they use a prescribed investor rate (PIR) rather than your marginal tax rate. If you're in a lower tax bracket, PIE funds can be more tax-efficient than regular managed funds. Understanding how PIE funds work can help you structure investments more efficiently.

Another consideration: how you draw down your savings matters. If you have both KiwiSaver and non-KiwiSaver investments, the order and timing of withdrawals can affect your tax position each year. Similarly, if you're earning rental income or still working part-time, managing these income streams alongside NZ Super requires some thought.

Tax planning in retirement isn't about avoiding tax (that's illegal). It's about structuring your affairs legally and efficiently so you keep more of what you've worked hard to save. A licensed Financial Advice Provider or accountant can help you navigate these considerations based on your specific situation.

If you've recognized yourself in any of these mistakes, you're not alone. The vast majority of New Zealanders make at least one of these errors at some point. The important thing isn't perfection. It's awareness and taking action.

Review your KiwiSaver fund and contribution rate annually. Understand what NZ Super will actually provide and calculate your income gap. Start saving as much as you can, as early as you can, and if you're starting late, don't let that stop you from starting now. Factor healthcare costs into your retirement budget. And think about the tax implications of your retirement income strategy.

None of this has to be overwhelming. Take it one step at a time. Review one aspect of your retirement plan this month. Make one change. Then tackle the next piece. Small, consistent actions compound over time, just like your retirement savings.

And remember, you don't have to figure this all out alone. This article is general information only and does not constitute personalized financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.