Making sense of KiwiSaver
KiwiSaver. With much more pressing things on our minds such as working, studying and finding time to enjoy life, it's no surprise that many of us generally don't put much thought into KiwiSaver or our financial future.
Thankfully, it can be quite simple.
What is KiwiSaver?
KiwiSaver was launched by the government in 2007 as some Kiwis aren't that great when it comes to planning for retirement.
It helps you save because when you put money in so does your employer and the government. On top of that, it's an investment so you get returns as well.
Your savings are made up of money you pay in to your KiwiSaver account, at least 3% from your paycheck, and money your employer pays in (at least 3% as well). If you're self employed, you can also make payments.
Once a year, the government chips in through their 'member tax credits (MTCs)' initiative - as long as you're also making payments (or 'contributions' in KiwiSaver speak).
Your money is locked in until you're 65, but there are some exceptions - you can take some of it out to put towards your first home or in times of significant financial hardship or illness.
How do you join?
There are a few ways you can join KiwiSaver. You can apply:
- through a financial adviser
- directly with a KiwiSaver scheme provider
- through your current employer, or
- you may be enrolled automatically when you start a new job. In this case, Inland Revenue (IRD) will place you in one of 9 "default" provider's schemes and you'll likely start off in one of these provider's default funds.
Once you join, the most important thing you can do is to make sure you are in the right investment fund. It can make a big difference to your savings over time.
Many people are in funds that aren't best suited for them - so make sure you're not one of them!
Choosing a fund
Here are some of the key things to look for when thinking about your fund choice.
A KiwiSaver account is an investment that will generally go up over the long run, but over shorter periods (e.g. year by year) will go up and down in value. How much your account goes up and down in the long run depends on what fund you're in.
Funds are generally divided into five categories: Conservative, Moderate, Balanced, Growth and Aggressive.
When choosing a fund to invest in, the key things to think about are your age (the easy part!) if you're wanting to withdraw your KiwiSaver funds for a first home (not quite so easy to answer) and the amount of short term ups and downs in value you think you can cope with (less easy to manage, which is why we have financial advisers to help us). By focussing on these three things, the returns will tend to look after themselves.
Most providers will have tools to help you work out which fund is best for you. They usually only take a few minutes to complete.
The graph below shows the difference in total savings over time* between conservative and growth funds:
*Based on a 20 year old with a starting salary of $35,000 contributing 3% of their salary and their employer contributing a further 3% for 45 years. Also assumes salary goes up 3% each year and government MTC contributions continue. An after tax and fees return of 7.5% has been used for the growth fund and 5.0% for the conservative fund.
As you can see, entering a growth fund early can have a huge impact on your wealth in retirement. You could live more luxuriously in retirement than in the workforce!
The graph also shows the power of compounding returns, often described in financial circles as the 'eighth wonder of the world'. By saving just 3% of your $35,000 salary or wages for 45 years in a growth fund, you should have around $1m when you retire - adjusting for future inflation at 2%, in today's $ that's around $500,000! Now that should help sort out your retirement dreams! And if you're thinking "but I can't afford to save 3%", did you know that 3% of $35,000 per year is just $20 week or $4 a day? Isn't it worth finding that $4 now to end up with $500,000 later?
Get into it
Here's some basic steps you can take to lift your KiwiSaver game:
- Check who your provider is if you don't know already. Many people are placed in one of the government's default provider schemes, and don't know who it is. You can find out by contacting Inland Revenue (IRD).
- Find out where your money is invested, what fund you are in and what level of return and risk you can expect. Your provider will be able to tell you this info. Pay attention to what else providers offer - some have added benefits and tools to help you stay on top of your money.
- Read up on the different types of funds and decide where to invest your KiwiSaver savings to meet your goals. Think about your age, when you can withdraw your funds and the amount of risk you're able to handle. Getting good financial advice can help you make the right decisions.
- If you care where your money is invested, check out Socially Responsible Investment (SRI) options offered by some providers. These funds typically avoid investment into alcohol, tobacco, weapons and other sensitive industries like fossil fuels.
- See if you can contribute more than just the minimum 3%. Every additional 1% voluntary contribution saved over a long time can have a huge difference when you need the money. Most providers will have tools to allow you to see what different contribution rates can mean to your future retirement savings.
- Make the most of the government's annual Member Tax Credits (MTCs) as it's pretty much free money. If you received the full MTC each year from the ages of 18 - 30, you could pocket over $8000 you can use towards a deposit on your first home!
- If you're planning a big OE or leaving New Zealand, you will need to consider what will happen to your KiwiSaver account.
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