Part 4: KIWISAVER - Financial Independence Series
10 Mar, 2024
The fourth part of this six-part series is one of the easier topics to cover, KiwiSaver.
Joining KiwiSaver is a no-brainer, and it still surprises me when I meet people who are not in it.
I’m always looking ahead and doing my best to determine what I might need money for and how much I might need. I keep my ear to the ground about how affordable retirement is for New Zealanders. I talk to people over 65 and ask them what advice they would give me about financially preparing for retirement. Then I ask myself if, on my current trajectory, I’m heading in the right direction.
Currently, in Aotearoa, those over the age of 65 receive a government superannuation payment, and your living situation dictates the amount you receive:
Current superannuation rates of NZ Super from 1 April 2023 after tax has been deducted at rate ‘M’. (www.sorted.org.nz) Click image to enlarge.
Therefore, if I meet someone not in KiwiSaver, you bet I’m interested in asking them about their financial situation and preparedness for retirement. If they are a single person living alone, I’m curious to find out if they can comfortably live on $496 a week. Or if they are married and both qualify, can they live their best life on $764 a week?
Some people can; some people can’t. Just this week, I spoke to someone who told me it was an immense struggle for them. I know that as it stands today, our weekly expenses exceed $764. I need to save up some money to cover the shortfall.
Bridging the gap.
The purpose of KiwiSaver is to allow Kiwis to save enough money to bridge the gap between what the government provides and what life actually costs.
In the ideal world, we would all just set up investment accounts on our own to do this, but a large portion of our population has zero clue about how to do that and with dodgy investment companies ripping off their clients in the past, many are scared even to go there. Even though KiwiSaver providers are private companies, the fact that our government set it up gives a high degree of confidence that KiwiSaver schemes are well-run and have a lot of oversight by the IRD and the Financial Markets Authority.
There is also the real risk of people doing the right thing by setting money aside for retirement but then doing the wrong thing by spending it all before they even get there. Therefore, ‘locking’ cash into a KiwiSaver account is a way to save us from ourselves.
It’s the government's job to predict the population's future issues. They saw what I see: a gap between a superannuation payment and what I might spend in retirement. For most Kiwis, KiwiSaver is one of the best tools to help us bridge the gap.
Should you join KiwiSaver? YES.
For most, KiwiSaver is an excellent way to ensure you retire with enough money to enjoy life once you cease working.
If you join KiwiSaver, unless there are some specific situations that you find yourself in, your money is locked in until the age of 65. This is perfect because I’ve met more people than I can count who would blow the lot if they could get their hands on it earlier. Locking it in gives people a fighting chance of a better retirement with less financial stress. Of course, there are no guarantees that they won’t blow the lot AT 65, but I hope that if someone has been studiously adding to their fund and watching it slowly grow over the years, they are less likely to treat it like a YOLO Lotto win.
Use your KiwiSaver to top up your pension payment.
Over a lifetime of working, thousands of small contributions add up to a decent chunk of change. When you reach retirement age, you can regularly spend a small amount of your nest egg to top up your fortnightly superannuation payment.
How do you build your KiwiSaver account?
Invest a percentage of each paycheque.
Your employer also invests a percentage of your pay.
The government adds $521 in July each year if you have contributed $1,042.
Your KiwiSaver fund compounds and grows due to exposure to the share market and other assets.
Here is a quick example showing what my KiwiSaver contributions looked like last week:
I earned $713 after tax (I doubled my hours to cover for a sick colleague).
My employee and employer contributions added up to $48. We both contribute just 3%. Each week, I add between $24 and $50 to my KiwiSaver account, depending on my work hours. Around July, the government will chip in $521. My balance will compound and grow over time.
Jonny was self-employed for a long time, so he set up an automated weekly voluntary contribution to his KiwiSaver account of $100 a month (this ensures he adds $1,042 annually). Every July, the government added $521, and his KiwiSaver compounds and grows over time, just like mine. The only thing missing was the employer contribution, but he never let that stop him from signing up. It’s short-sighted to think that KiwiSaver is not worth it if you are self-employed because you will still get the government top-up and let your contributions grow in the share market.
Another life event that often sees people stopping KiwiSaver is if they have children and their income stops. When this was my reality, I made voluntary contributions. We have 100% shared finances, so any money that comes into our home, no matter who created it, is ours. I invested a portion of our take-home pay (~ $100 a month) into my KiwiSaver so that I didn’t miss out on government contributions and years of compounding returns.
Times are tough for some.
I’m fully aware that the struggle is real around Aotearoa, with every $100 earned by a person being pulled in a dozen different ways. Sometimes, contributing to KiwiSaver gets dropped in favour of making rent, tertiary study costs, mortgage payments, and general bills. I get that times are hard for many at the moment. But I also know that for many, times are not so hard, myself included. I’ve spent a long time getting ourselves on a stable financial footing. This is why we contribute $50 to our daughter’s KiwiSaver each month as part of our generosity to others. If you have the means and have children or mokopuna, think about donating weekly/fortnightly or monthly to their KiwiSaver fund to give them a head start or keep their balance building at a time when they simply cannot. If they are over 18, voluntarily adding $20 a week to their KiwiSaver account adds up to $1,040 a year, giving them an additional $521 annual government contribution.
How much should you contribute?
In my opinion, the short answer is “More than 3%.”
Once again, look around you to understand what others are up to.
In Australia, workers and their employers contribute around 20% to their compulsory superannuation scheme. They are not messing around regarding retiring with a healthy superannuation fund.
I listen to many American podcasts, and the percentage of take-home pay added to retirement accounts is about 15%, plus employer contributions.
In New Zealand, so many of us (myself included) set our contribution rate at the lowest possible, 3% (more on why I do this shortly). And our employers have done exactly the same; they don’t want to pay any higher than they absolutely have to because it adds costs to their business. But we do have other contribution options: 4%, 6%, 8% or 10% of your gross (before tax) wage. As an employee, you can choose any rate you like. But it doesn’t mean your employer has to match it. I speak to many people, and 3%-4% seems pretty standard when it comes to employer contributions, and it takes a masterful negotiator to get them to go much higher than that. But don’t let what your employer contributes stop you from upping yours.
This is what a higher contribution rate looks like over time.
Let’s run some KiwiSaver scenarios based on a $60,000 income and either 3% or 10% contributions using the Sorted KiwiSaver Calculator:
Scenario 1: 3% KiwiSaver contributions based on $60,000 income is about $427 per week until you are 90.(Sorted KiwiSaver Calculator) Click image to enlarge.
Scenario 1: 10% KiwiSaver contributions based on $60,000 income is about $958 per week until you are 90. (Sorted KiwiSaver Calculator) Click image to enlarge.
Ask yourself: would you rather have $463,824 ($427 a week) in retirement or $1,039,949 ($958 per week)?
When you default, as many do, to 3%, you agree to potentially have $576,125 LESS in your KiwiSaver fund at 65 years old. Is that the future you see for yourself?
I encourage you to ‘pay yourself first’ and consider upping your KiwiSaver contributions to a more meaningful amount. Yes, this will mean you take home less in your pay packet, but if you have read my other blog posts in this series, you will have freed up some space in your budget to allow for this. And remember, by upping your KiwiSaver contributions, you are not ‘spending’ the money; you are moving it off into investments that will grow over time.
Risk
I think about risk by asking myself, “How much money do I want in retirement?”
Only a small amount? I’ll join a Conservative KiwiSaver Fund.
As much as I possibly can? I’ll join an Aggressive KiwiSaver Fund.
There are hundreds of KiwiSaver funds to choose from, and they are spread across a range: Defensive, Conservative, Balanced, Growth, Aggressive, Lower risk, Higher Risk
Sorted put it nicely when they say “Each fund holds a mix of investments, and which type they fit into is based on how much of the more risky stuff, like shares and commercial property, is in the mix. The more risk you take on, the more potential you have for better results, but your balance will have more ups and downs along the way. Depending on how long you are investing for, and your attitude towards the ups and downs that can happen with investing, one type of fund will work particularly well for your situation.”
The longer you are a KiwiSaver investor, the more used you will get to the ups and downs of your balance. I’ve been investing in an aggressive fund since the early days of KiwiSaver and have become entirely nonplussed at the ups and downs of my account balance. It’s simply what it does. I’m saving for retirement; time is on my side, and over the long term, the only way my balance is going is up.
Risk is about your attitude, and I’d encourage you to harden up a bit and understand that when you are in a more aggressive fund, your balance will go up and down more, but over time, your returns should be higher. If you are tracking your net worth, you will see that your KiwiSaver balance will rise over time.
Which fund provider should you choose?
I’ve saved the most problematic question till the end. Because I have zero financial qualifications, I can’t give you financial advice, so I can’t say, “Join this fund”. Which is no help to you at all, I know. Annoyingly, you will come up against this brick wall time and again. It’s on you to do your homework and make a decision.
Here is a way around it: a way for you to choose your KiwiSaver fund with some degree of confidence.
There is no perfect KiwiSaver provider, but many are perfectly fine.
The fees you pay need to be as low as possible. Look for companies whose fees are less than .5%. The fees I pay for my High Growth (Aggressive) fund are .25%.
Secondly, when it comes to choosing between a defensive fund and an aggressive fund, think long-term. If you have studiously added to your KiwiSaver for the last 15 years and are retiring next year, you are unlikely to blow the lot on your birthday. The whole point is that you make your KiwiSaver last as long as you do. Therefore, if you retire at 65, you still have, if you are lucky, 35 years to go. That is a long investment horizon. So, don’t rush to a conservative fund just because you are 65. You may move one or two years of money into a more conservative fund and use that to top up your superannuation, but keep some money invested and working for you, too.
Given that hundreds of funds exist, ask your friends whom they invest their KiwiSaver with and listen to my podcast for everyone who shares the provider they use. Write out a list of providers, fees and fund types, and then go to the Sorted Smart Investor tool to compare funds. I like to refine my search using the Sort by: Fees (lowest first) tool.
Take just a few hours to educate yourself about what others invest in and why, then refine your selection, pick one and go with that.
Although I don’t advocate switching providers every ten minutes (I’ve only switched providers once), I want you to feel comfortable enough to decide and see it through. But if you want to change funds again, you can. If you do a little research and think you are in the wrong type of fund, i.e. too low or too high-risk, just go to your provider's website and switch your fund.
If you want to change to a different provider, go to the new provider website, and they will make the switch for you.
The biggest handbrake to your financial success is indecision, so make a choice and get on with it. Update your balance at your monthly net worth check-in, then review your fund choice annually.
First home buyers
Don’t worry. I’m not ignorant of the fact you can drain your KiwiSaver to buy your first home, but I do want to encourage you not to. Once again, look overseas at how others save for retirement in a retirement account. And they save for a house deposit in a bank or investment account. We are sacrificing our retirement when we drain our funds to buy a home, and I’m teaching my daughter (16) that she can save for both simultaneously.
The banking industry has aggressively gone after people’s KiwiSaver account balances in order for them to hand out more mortgages. So, if you have enough lead time, I’m encouraging you to save for your retirement and your house deposit concurrently.
My daughter has a High Growth (aggressive), low-fee (.25%) KiwiSaver fund where she invests a portion of her pay cheque, and we chip in $50 a month, too. A retirement fund needs regular contributions over a lifetime for compounding to work the best. And she is also investing in ETF funds outside of KiwiSaver for a home she will one day buy.
You can save for both simultaneously, but require a plan early in life.
Don’t delay. Join today!
I’ve not gone into all aspects of KiwiSaver, but Sorted has, and I encourage you to read this Sorted article: How KiwiSaver works and why it’s worth joining. But in a way, my trying to keep it brief is the whole point: stop second-guessing if KiwiSaver is worth it or not. Because it absolutely is.
For those who’ve followed my blog for a while, you’ll remember that both Jonny and I contribute the minimum 3% to our KiwiSaver accounts by choice. KiwiSaver makes up a part of a more comprehensive retirement strategy. We want to retire in our early 50s, so we are investing as much as possible in our non-KiwiSaver ETF investments. We must access our investments before age 65 as they will provide the income we need to live off. If this were not the case, I would invest a higher percentage into our KiwiSaver accounts.
Despite going about it differently from most, we still invest about 30% of our income, way beyond the 3% + 3% that most do. Our combined KiwiSaver account balance is now $200,000, plus we have a significant amount invested outside our KiwiSaver accounts. Imagine if we had been on a more traditional retirement path of retiring at 65 instead and had set a higher contribution rate of 10% from the get-go; our balance would be so much higher today, and with 15 years to go until we can access it, it would continue to compound and grow.
I meet a lot of retirement daydreamers. They have a hazy scenario in mind of what retirement looks like, but they have yet to make plans to achieve it other than a vague notion of downsizing the house to release equity. What will they then do with that equity? They have no idea. But those who have consistently added to their KiwiSaver see their retirement pot growing, and they understand how it works, giving them some certainty in retirement of just how much money they will have to top up those superannuation payments. If a house downsize is in the cards for their future, they know that even after 65, they can add money to their KiwiSaver investment, giving them an even greater nest egg to see them through.
So, don’t just dream it; join KiwiSaver and do it.
