KiwiSaver is an increasingly important part of many New Zealanders’ financial lives. We pull millions of dollars out of the scheme each year to buy first homes, as well as helping out in financial emergencies, and it is a big part of lots of people’s retirement planning.
But are you getting the most out of your KiwiSaver scheme?
The nature of long-term investment means that decisions that you make at the outset can have a big impact over time, so it’s important to get things set up well as early as possible.
Here’s a quick KiwiSaver 101.
Check your risk profile
A great first place to start is to think about your risk profile. This refers to your willingness to take risks with your investment.
Someone who needs to withdraw money in three months’ time to buy a house won’t have much appetite for risk at all, because they will need to know exactly how much money they have available.
But someone who is thinking about making a withdrawal in 40 years will have much more appetite for risk because they have many years to ride out any turbulence in the market.
There are online tools that can help you work through what your risk profile might be.
You might think: Why bother to take any risk at all?
In investing, risk can be a positive because it should boost your returns.
“The theory goes that the higher the return you are after, the more risk you are willing and will have to take. The more volatility you can accept in the short term, the greater the expected return in the long term,” said Dean Anderson, founder of Kernel KiwiSaver.
Choose your fund
Once you know what sort of risk you should be taking with your investment, you can choose the right KiwiSaver fund for you.
Most KiwiSaver funds can be described as either cash, conservative, balanced, growth or aggressive. You can find variations on this, and some providers offer single-asset funds that you can add to your portfolio, investing in things like property and cryptocurrency. Some providers also allow an element of DIY and stockpicking for individual investors.
If you can take more risk, a growth or aggressive fund is likely to be the best option for you.
“These funds typically offer higher returns over time, but with more volatility. Given your horizon, you can handle those fluctuations in value and expect to benefit as a result,” Anderson said.
“As an example, if you’re in your late 30s and already have your first home, opting for a high growth fund could allow compound returns to maximise your savings by the time you retire.”
But if you might buy a first home within three years, a conservative or cash fund might be better. Many people have had the experience in recent years of going to withdraw their money and finding the market had dropped at just that moment.
Cash and conservative funds focus on preserving your balance but generally deliver lower returns.
When it comes to adding in things like pure portfolio funds or investments in cryptocurrency, it could be a good idea to do this with some personalised advice.
“Cash has the lowest risk, therefore the lowest expected return. Of the four major asset classes (cash, bonds, property, shares), shares have the highest risk and the highest expected return. Share funds are lower risk than individual shares, and crypto assets, commodities and “private investments” are even higher risk,” Anderson said.
Choose your provider
You’ll also need to think about which provider is right for you. You can go with your bank, or another major fund manager, or one of the smaller providers.
Fees vary, as do investment management styles. You might think a low-fee manager that tracks a market index is a good option, or you might be looking for a manager who can beat the market, or one who delivers a responsible investment strategy that aligns with your beliefs.
There are lots of options, so it’s worth taking the time to find one that’s a good fit. Tools like the Sorted Smart Investor can be handy here. Mindful Money is a great platform for anyone wanting to check what their fund might be invested in.
Set your contributions
You’ll need to choose how much you want to contribute. If you’re an employee, you can choose to automatically contribute 3 per cent, 4 per cent, 6 per cent, 8 per cent or 10 per cent of your gross salary. Your employer will match your contribution at 3 per cent, and some offer higher rates. Those default contribution rates are slowly increasing over time and could increase further if National is successful at the next election.
The right contribution for you will probably depend on your goals. A 10 per cent contribution rate will boost your balance much faster. But the money is locked in until you buy a first home or turn 65.
If you’re a while away from doing either of those things, you might only contribute what your employer will match and invest the rest of what you have available somewhere else (provided you are sure you will actually do this).
The great thing about KiwiSaver is that the money is taken for contributions before you see it, so there’s no temptation to do something else with it. If you’re building up other investments, you might want to apply the same policy to those and have the money taken automatically.
Some providers suggest working out how much of a lump sum you want at retirement, and then working backwards to determine what you need to save now to get there.
It can be really hard to think clearly about something that’s a long time in the future, though, so my advice if you’re still decades away from retirement is just to save and invest as much as you can while meeting other financial goals, such as paying off a mortgage and enjoying your life.
Check annually
Don’t set and forget your KiwiSaver. Check on it every year to see whether it’s doing what you’d expect, given the market movements. Even if you’re not working for a while, try to contribute at least $1042 so you get the full Government contribution each year. It’s not as big as it was, but it’s still worth having!
At retirement
When you get to 65, you can withdraw all the money in your KiwiSaver account. But you don’t have to. You might still have 30 years of living costs to fund, so you might choose to leave some or all of it invested and earning returns for a while. Personalised advice can help here too, to come up with a plan to draw down your money over time in a way that works for you.
