Booster: Your Guide to KiwiSaver, Part Two
The higher your KiwiSaver balance grows, the better off you’ll be for two important life goals: buying your first home or enjoying a good retirement. Here’s how to turbocharge your balance.
25 May 2022
Take a good look
You can’t keep on track unless you know what your account balance is.
Your provider will send you an update once a year, with a handy retirement estimate in it.
It’s a good idea to check your KiwiSaver account balance at least a couple of times a year to make sure you’re on track.
But there’s no need to check it every day or every week. It’s the long-term direction that counts.
If your balance hasn’t gone up as quickly as you’d like, ask yourself these quick questions:
- Could I put in more of my earnings?
- Do I have extra savings that I could put into the account as a lump sum?
- Could I cope with a higher level
of risk to potentially get better returns?
- When will I need the money? If it’s not soon, could I move into a more aggressive fund: from Conservative to Balanced, or from Balanced to Growth?
- Am I putting in enough to get free money from the government, known as the government contribution?
Let’s talk about each of those options.
How much are you putting in each pay?
The first step is to work out how much is going into your account each pay. Take a look at your pay slip. There will be two KiwiSaver amounts in it.
One will be the percentage of your salary you’re contributing.
The other will be the amount your employer puts in, 3%. Tax is deducted from this amount.
To be in KiwiSaver, the smallest amount you can put in is 3% of your before-tax pay, but in 2019 the percentages you can put in changed to give you more choice. Now you can choose to put in:
3%, 4%, 6%, 8% or even 10%.
There’s a big difference between putting in the minimum 3 per cent and putting in more money each pay.
Someone on an average salary who puts in 10 per cent of their salary over a lifetime of working will be $229,000 richer at 65 than those putting in 3 per cent, says the Retirement Commission’s website Sorted.org.nz.
Put in a lump sum
If you’re working hard towards a goal like a first home or you’re nearing retirement, lump sums thrown into your KiwiSaver account can make a huge difference to your balance.
You could have a work bonus, a gift, the cash from things you’ve sold on TradeMe, a legacy, or just money you’ve saved up over lockdown.
If you leave big sums in your bank account, it’s too tempting to spend it. And you’ll get next to no return on it in the bank.
Maybe you’ve set and stuck to a budget to work out where you could save some extra money.
Booster has a free app that helps you work out where your money is being spent. mybudgetpal connects directly to your bank accounts, sorting your spending and showing where your money is going. And it’s free!
Tip: Before you lock money into KiwiSaver, it’s good to have several months of living expenses sitting in an account for emergencies. Remember, you can only draw money from KiwiSaver for specific reasons, including to buy your first house or for retirement.
But the beauty of investing any spare money into your KiwiSaver account is that it should grow over time with the power of compounding returns.
The magic of compounding Returns
You can think of compounding returns as returns on returns.
When you invest, you get returns, made up of dividends, plus the growth of the value of your funds’ assets. This can be thought of as ‘simple returns’.
But if you never take out your returns, they’ll add to your total where they earn returns too and ‘compound’ so you’ll get returns on that money as well.
This effect looks quite small in one to three years, but by the time your investment has been generating returns for eight years or more, the growth accelerates and gives your investment an amazing boost.
Here’s how it works
Each time you and your employer make a contribution, that’s added to your total and this new total then grows. If you started investing in KiwiSaver at age 20, had a starting salary of $70,000 and chose a balanced fund, here is how your balance could grow (based on employee contributions of either 3% or 10% p.a.).
Don’t miss out on free money.
Once a year, the government will put its contribution into your account – 50 cents for every dollar you put in, up to $521 each year.
You don’t have to do anything, because your provider does it for you.
Just make sure you’re contributing at least $1043 each year to get the free government money.
The government contribution is based on what you put in before 30 June each year.
If you didn’t put in the whole $1043, you’ll still get some money, but only a proportion of it.
If you’re self-employed or don’t earn a lot, it’s a good idea to put in a lump sum to bring up your contributions to $1043. Just do it before 30 June to qualify.
How much will you need?
If you’re buying your first home, you’ll have a reasonable idea of how much you’ll need in your account to get a 10 or 20 per cent deposit on a house.
But retirement can be a big unknown. How long will you live? How much does it cost to live every year?
That’s where calculators can keep you on track.
www.sorted.org.nz is run by the Retirement Commission. It has tools to work out how much money you’ll need to have invested to retire on the weekly amount you’d like.
Are you in the right fund for better returns?
Being in a higher growth fund generally offers you the chance of better returns.
Growth funds have a larger proportion of shares than either Balanced or Conservative funds but are more volatile; that is, you’ll sometimes see your balance drop.
If you don’t need your money soon, and you’re comfortable with some ups and downs in your balance, you usually find that Growth funds simply grow faster over the long term.
It’s easy to switch to a higher growth fund with your provider, usually on their app or by making a phone call.
Get your tax rate right
Don’t pay too much tax. Get it right, because you won’t get a refund – but mess it up and you might get a bill.
The tax you pay on a managed fund like KiwiSaver is called a PIR, a prescribed investor rate.
Your rate depends on your income, from 10.5 per cent, say for a retiree only getting NZ Super, to 28 per cent tax, the rate most of us pay if you earn a fulltime salary.
If you stop working and your income drops, your PIR should, too, leaving more money in your KiwiSaver account.
But if you earn more money from all sources one year, you might need to let your provider know to put you on a higher rate.
To find out if you’re paying the right tax, go to the IRD’s Find My Prescribed Investor Rate section.
Pick the right provider
There are several things to look for in a provider. They are:
- The fees you pay represent good value for the overall service you receive, including returns, benefits like free insurances and digital tools.
- That your values align. Even if the returns are good, you may not feel good about investing in a fund that jars with your values, say for sustainability.
- Their app or website is simple and easy to use.
- They educate you about investing, with advice, support, and good customer service. And they tell you how they invest and what’s going on in the markets.
To compare providers and fund performance, check the Financial Markets Authority’s KiwiSaver Tracker
or the Sorted Smart Investor website, www.smartinvestor.sorted.org.nz.
Finally, the best money you ever spend could be on a financial adviser – and some will give you a basic plan for free.
The Financial Services Council has run the numbers and found that over a Kiwi’s working career, you could be a million dollars better off if you use an adviser.
Advisers closely watch all the KiwiSaver providers and their returns. They’ll recommend the right fund for your personal risk profile and goals.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.