Bloomsbury newsletter, 30 June 2014
With the upcoming elections, KiwiSaver has again become centre of attention as political parties release policy and then debate it in the media. On a positive note, this means KiwiSaver is in the news and at the front of our minds.
A focus on KiwiSaver is a good thing. Part of a financial adviser's role is to help clients make smart decisions about their money, and joining KiwiSaver is often one of those smart decisions.
So what do you need to think about when it comes to KiwiSaver?
I was explaining the benefits of joining KiwiSaver to a 61 year old. She doesn't work, and was wondering why she should contribute anything to KiwiSaver.
I told her to imagine that there was a cash machine in her kitchen. The machine worked this way - if you put a dollar in it, it would give your dollar back, plus 50 cents extra. In fact, the machine would do this for the first $1,043 you put into it every year, clicking over at the end of June.
I asked her how often she would put a dollar into that machine. Of course, she said 1043 times.
She now contributes about $87 per month to her KiwiSaver, in order to get the full benefit of the government member tax credit each year.
In spite of the $521.43 'free money' on offer from the government by way of the member tax credit, Inland Revenue statistics show that "over half of eligible KiwiSaver members (55%) are not taking maximum advantage of the member tax credits as their contributions are less than $1,040."1
If you are a member and don't already contribute at least $87 a month to your KiwiSaver, you may like to consider increasing your contributions, either monthly or as a lump sum top up each year.
In the first year that you join KiwiSaver, you get even more than an extra 50 cents back for every dollar invested. The government's $1,000 tax free kickstart payment makes sure of that.
Employees not only get those government contributions - an employer will also contribute an amount equal to 3% of your pay (less tax)*.
When you add up the kickstart, the member tax credit and your employer's contributions, your KiwiSaver balance is already off to a great start by the end of your first year of membership.
One of the 'drawbacks' of KiwiSaver is that the money is tied up until age 65, or whatever the official retirement age is when you reach it. However, this drawback is also a benefit - for many of us, it means we're not going to see that money for over a decade. This means we can potentially take some risk with it.
But many KiwiSaver investors aren't taking risk. The largest pool of KiwiSaver money is in the conservative category. One reason for this is that all KiwiSaver default funds are conservative.
These funds are meant to be a holding place for your KiwiSaver contributions until you decide your investment style and long term investment needs, but many people just leave their money sitting there.
I was speaking with someone in their mid thirties recently. We were talking about KiwiSaver and I asked him what allocation he was in. He said, "Conservative." I almost fell off my chair.
"Conservative!" I said. "You're not going to see that money for thirty years. What are you doing in a conservative fund? Do you have any idea how much this is going to cost you?"
How much is it going to cost him?
Imagine my friend's current annual KiwiSaver contributions, including employer and government contributions, are $6,000 a year, which then grow at the rate of inflation. He has two fund choices - a conservative fund making 5.5%, and a growth fund making 7.5%.
After thirty years, what is the difference in returns? The answer is over $213,000.
If you have a longer time horizon, then you should strongly consider taking risks appropriate to that time horizon. Remember, your time horizon is not merely the time until age 65, unless you plan to spend the entire lump sum at that moment. For those using the funds to support their retirement, the time horizon extends to life expectancy.
Your adviser can help you determine the appropriate amount of risk to take for your circumstances.
When talking about KiwiSaver, the role of a financial adviser is simple. An adviser:
We know that making smart choices about KiwiSaver is straightforward to write about, but often neglected.
Make the right decisions by talking to your adviser and visiting the KiwiSaver website for all the information you need.
* Your employer does not have to make compulsory employer contributions to your KiwiSaver scheme if: