The KiwiSaver program is a vital component of New Zealand's retirement savings landscape. Established in 2007, it is designed to encourage New Zealand citizens to save for retirement by providing various incentives and investment options.
In recent years, there has been a significant and surprising trend within the KiwiSaver program—Baby Boomers, those aged 65 and above, have been increasingly withdrawing substantial sums from their KiwiSaver accounts due to the rise in term deposit rates.
Explore this current trend in bank term deposits and its implications on KiwiSaver funds.
Soaring Bank Term Deposits
Term deposit rates are low-risk savings schemes where you deposit money to the bank and agree not to spend that money for a certain amount of time. In return, the bank gives you interest, basically a reward for keeping money at their bank. Once the agreed time is up, you receive your deposited money, plus the extra interest.
Term deposits have become more popular due to the Reserve Bank of New Zealand (RBNZ) raising interest rates to fight inflation. When central banks increase interest rates, they seek to make borrowing more expensive. The RBNZ determines the official cash rate (OCR), which is the rate that commercial banks can borrow from the RBNZ. As a result of the increased OCR from the RBNZ, commercial banks must pay higher rates on their term deposits. Moreover, commercial banks compete with each other, resulting in more attractive interest rates on the market. As a result, the RBNZ's decision to raise interest rates encourages citizens to save more and spend less, aiding in the fight against inflation. The average interest rate for a one-year bank term deposit doubled to 5.6% in the last year (2023) due to increased spending following the pandemic, which subsequently led to the Reserve Bank of New Zealand's decision to increase interest rates to curb inflation. As a result, this has presented an excellent opportunity for savers to invest in term deposits.
Rising KiwiSaver Withdrawals By Baby Boomers
Term deposits are a safe investment option, and currently, they offer high-interest returns, which makes them very attractive, especially for individuals like retirees who cannot afford high risks. As a result, many retirees are choosing to withdraw their entire KiwiSaver funds and invest in term deposits.
Retirees are advised to exercise caution when considering withdrawing their entire KiwiSaver savings for term deposits. Although term deposits currently offer attractive interest rates, these rates are subject to fluctuations and may not remain favourable throughout an individual's retirement.
Furthermore, transitioning from term deposits back to investment options such as KiwiSaver growth requires precise market timing, which can be challenging to achieve. It's worth noting that financial markets typically experience their most significant gains when interest rates are on the decline, making timing of the switch back even more difficult.
Moreover, term deposits, which offer security, may not keep up with inflation. KiwiSaver funds, especially those with exposure to growth assets like stocks and bonds, have the potential to surpass inflation, protecting the purchasing power of retirees' savings.
To recap, while term deposits offer security and high-interest returns, National Capital suggests that retirees should exercise caution before withdrawing all their KiwiSaver savings for this purpose. The KiwiSaver scheme offers cash funds that specifically invest in income assets such as term deposits and are managed by a team of professionals. Additionally, KiwiSaver funds with exposure to growth assets like stocks and bonds have the potential to outpace inflation, safeguarding retirees' purchasing power. Therefore, a balanced approach that maintains some funds in KiwiSaver may offer retirees the best of both worlds: security and the potential for growth.