Structuring Retirement Savings Across KiwiSaver, Shares and Cash

Sarah, 62, came to retirement with $450,000 in KiwiSaver, $180,000 in shares outside KiwiSaver, and $65,000 in savings accounts. She'd done everything right: saved consistently, diversified her investments, and kept an emergency fund. But when it came time to plan her retirement income, she faced a question that stumped her: which account should I draw from first?

If you've accumulated retirement savings across multiple accounts, you're already ahead of most New Zealanders. But understanding how these pieces fit together, and in what order to access them, can make a significant difference to how long your money lasts and how much tax you pay along the way.

Let's break down how to think about asset allocation across your retirement savings, why diversification across account types matters, and the framework for deciding which bucket to tap when.

Most New Zealanders approaching retirement have accumulated savings across three main types of accounts, each with distinct characteristics:

Bucket 1: KiwiSaver
Your KiwiSaver account has grown through employee contributions, employer contributions, and government contributions over the years. It benefits from Portfolio Investment Entity (PIE) tax rates, which are typically capped at 28% for most investors. According to Inland Revenue, PIE rates can be as low as 10.5% or 17.5% depending on your income, making KiwiSaver tax-efficient for many retirees.

You can access KiwiSaver from age 65 (the NZ Superannuation qualification age), but the money remains invested until you actively withdraw it. There's no requirement to take distributions, unlike retirement accounts in some other countries.

Bucket 2: Shares and Managed Funds (Outside KiwiSaver)
These are investments you've made with after-tax dollars, outside the KiwiSaver framework. They might include direct shares, exchange-traded funds (ETFs), or managed funds. If held in non-PIE structures, these investments are taxed at your marginal tax rate on dividends and require you to pay tax on gains if you're considered a trader (though most long-term investors don't face capital gains tax in New Zealand on share sales).

Foreign shares may be subject to the Foreign Investment Fund (FIF) rules, which tax unrealized gains annually, making them more complex from a tax perspective.

Bucket 3: Cash and Term Deposits
Your savings accounts, term deposits, and readily accessible cash. Interest earned is taxed at your marginal rate, and with term deposit rates fluctuating between 4-6% in recent years, the after-tax return can be modest. However, this bucket provides liquidity and stability, crucial for covering immediate expenses and weathering market volatility.

When financial advisers talk about asset allocation, they typically mean the split between growth assets (shares, property) and income assets (bonds, cash) across your entire portfolio. A common principle is that your allocation to growth assets might decrease as you age, though this varies based on individual circumstances.

But here's where it gets interesting for retirement planning: your overall asset allocation and your account-level allocation are two different considerations.

The Overall Picture
Let's say your target allocation is 60% growth assets and 40% income assets. With $695,000 total across all accounts, that means roughly $417,000 in shares/growth funds and $278,000 in bonds/cash.

You might structure this as:

• KiwiSaver: $450,000 in a balanced fund (roughly 60/40 itself)
• Shares outside KiwiSaver: $180,000 (100% growth)
• Cash/term deposits: $65,000 (100% income)

Your actual allocation: approximately 63% growth, 37% income. Close enough to your target, with the flexibility to adjust.

Time Horizons Matter
The key insight is that not all your money has the same time horizon. Money you'll need in the next 1-2 years has a very different job than money you won't touch for 15 years. This is where the concept behind the bucket strategy becomes relevant: matching asset types to time horizons.

Your cash bucket covers immediate needs (1-3 years). Your bond allocation or conservative investments cover medium-term needs (3-7 years). Your growth investments are for expenses 7+ years away, giving them time to recover from market downturns.

Now we arrive at the crucial question: when you retire and need to start drawing income, which account do you tap first?

For most New Zealanders, the tax-efficient withdrawal sequence typically follows this order:

Step 1: Spend Down Cash First
Start by drawing from your cash savings and term deposits. There are several reasons for this:

• Cash earns modest returns that don't keep up with inflation over long periods
• Interest is taxed at your marginal rate, which could be 33% or 39% if you're still earning other income in early retirement
• Using cash first keeps your growth investments working longer, potentially earning higher returns
• It maintains your diversification while reducing the lowest-performing asset

However, don't drain your cash completely. Maintain an emergency reserve of at least 6-12 months' expenses for unexpected costs (medical, home repairs, car replacement).

Step 2: Draw from Non-KiwiSaver Investments
After depleting excess cash, turn to your shares and managed funds held outside KiwiSaver. The logic:

• If these are in taxable accounts, dividends and interest are taxed at your marginal rate
• Selling shares that have grown in value typically doesn't trigger capital gains tax for long-term investors (though there are exceptions)
• This preserves your KiwiSaver's favorable PIE tax treatment for longer
• It reduces the complexity of managing multiple investment accounts in later retirement

When selling from this bucket, consider selling in tranches over multiple tax years to manage your taxable income and stay in lower tax brackets if possible.

Step 3: Preserve KiwiSaver Longest
Your KiwiSaver should typically be the last bucket you tap, for several compelling reasons:

• PIE tax rates max out at 28%, compared to the 33% or 39% marginal rates you might pay on other investment income
• Keeping money in KiwiSaver maintains this tax advantage for as long as possible
• You can leave funds invested and withdraw only what you need, allowing the rest to continue growing
• In later retirement when your other income sources are depleted, KiwiSaver withdrawals paired with NZ Super may keep you in lower tax brackets

A common approach is to leave KiwiSaver untouched until age 70-75, or even later if other resources suffice. This can add years of tax-advantaged growth to your retirement savings.

One critical piece that influences your withdrawal strategy is NZ Super, the government-funded pension most Kiwis qualify for at age 65. As of 2024, NZ Super provides approximately $27,000-$44,000 per year depending on your living situation and relationship status, according to Work and Income.

This guaranteed income stream changes your withdrawal math significantly. If NZ Super covers your basic living expenses, you might:

• Not need to tap any savings for several years after 65
• Only withdraw for discretionary spending (travel, hobbies, helping family)
• Keep more money invested in growth assets longer than traditional advice suggests

Conversely, if you retire before 65, you'll need to bridge the gap until NZ Super kicks in. This is where your withdrawal sequence becomes especially important. Consider keeping 5-7 years of expenses in conservative investments if you're planning to retire at 60, as discussed in our guide on retiring early in New Zealand.

Having money in different account types isn't just about tax optimization. It provides strategic flexibility:

Access Flexibility
KiwiSaver is locked until 65 (with limited exceptions). Money outside KiwiSaver gives you options if you need to retire early, face unexpected expenses, or want to make a large purchase before 65.

Tax Bracket Management
Drawing from different accounts in different years lets you manage your taxable income. In a year when you have high income from other sources, you might draw more from KiwiSaver (taxed at the lower PIE rate) rather than selling shares that would push you into a higher bracket.

Investment Choice
KiwiSaver funds offer simplicity but may limit your investment options. Having money outside KiwiSaver lets you access specific shares, ETFs, or investment strategies not available in KiwiSaver funds. Our comparison of managed funds versus ETFs explores these trade-offs.

Estate Planning
Different accounts may have different implications for your estate. KiwiSaver funds transfer to your estate and are generally accessible to beneficiaries relatively quickly. Understanding these nuances becomes important for comprehensive retirement planning.

Maintaining your target asset allocation requires periodic rebalancing. When you have multiple accounts, this becomes more complex but also creates opportunities.

Tax-Efficient Rebalancing
Suppose your shares have performed well and now represent 70% of your portfolio instead of your 60% target. You need to rebalance by moving some growth assets to income assets. Your options:

• Sell shares in your KiwiSaver fund (within the fund's structure, this typically doesn't trigger personal tax events)
• Sell shares outside KiwiSaver (generally no capital gains tax, but you lose the investment)
• Direct new contributions or dividends into income assets instead of reinvesting in growth

Inside KiwiSaver and PIE funds, rebalancing typically doesn't create personal tax events. Outside these structures, you'll want to consider the tax implications of each transaction.

Using Withdrawals to Rebalance
In retirement, your regular withdrawals become a rebalancing tool. If shares have grown beyond your target allocation, sell shares to fund your living expenses. If shares have dropped and bonds are now overweight, sell bonds for income. This natural rebalancing through withdrawals is one advantage of having multiple account types.

Withdrawing from KiwiSaver First
Many people reach 65 and immediately start drawing down KiwiSaver simply because they can. Unless you have specific tax reasons, this typically sacrifices years of favorable PIE tax treatment.

Keeping Too Much in Cash
While cash provides security, holding excessive cash (more than 2-3 years of expenses) in a low-interest environment means your money loses purchasing power to inflation. Historical data suggests balanced portfolios have better preserved spending power over retirement timeframes of 20-30 years.

Ignoring Account-Specific Tax Treatment
Drawing from accounts without considering their tax characteristics can result in paying significantly more tax than necessary over the course of retirement. A financial adviser can model different withdrawal sequences to illustrate the potential tax savings.

All-or-Nothing Withdrawals
You don't have to fully deplete one account before touching another. Sometimes a blended approach makes sense, particularly for managing tax brackets or maintaining diversification. The sequence described earlier is a starting framework, not an ironclad rule.

Here's a framework to help you think through your own situation:

Before Retirement (Age 50-64)

• Build cash reserves to 12-24 months of expenses if retiring before 65
• Consider your overall asset allocation across all accounts
• Maximize tax-advantaged accounts (KiwiSaver) while they're still receiving contributions
• Think about whether investments outside KiwiSaver serve a specific purpose (early access, specific investments, estate planning)

Early Retirement (Age 60-65, if applicable)

• Draw from cash first, maintaining 6-12 months' emergency buffer
• Supplement with non-KiwiSaver investments as needed
• Preserve KiwiSaver for after-65 income
• Manage withdrawal amounts to stay in favorable tax brackets

Traditional Retirement (Age 65+)

• Assess how much of your lifestyle NZ Super covers
• Continue drawing from cash and non-KiwiSaver investments for additional income needs
• Delay KiwiSaver withdrawals as long as practical
• Review your asset allocation annually, adjusting for age and risk tolerance

Later Retirement (Age 75+)

• Simplify by consolidating accounts as your energy for financial management changes
• KiwiSaver becomes your primary drawdown account
• Maintain enough cash for immediate needs and potential health costs
• Review your estate plans and ensure beneficiaries are updated

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.