It’s a great idea to get all the incentives in KiwiSaver

Employees usually receive their full employer and government contributions, unless they are on a savings suspension. But what about everyone else?

There are still too many self-employed people and others not in the work force getting nothing, or less than they can, from KiwiSaver.

Enter a reader we’ll call Jill

She’s 61, has been in KiwiSaver since it started, and worked until two years ago. Now, though, she’s a full-time foster parent to three young children. “I don’t receive taxable income, just an allowance, so am not currently putting any money into my KiwiSaver,” she says.

Jill recently finished paying off a loan for a lounge suite at $200 per month. “I want to continue to do something with that money,” she says.

“Should I save it and pay it towards my mortgage, or should I add it to my KiwiSaver? I know I am missing out on the government payment, but don’t know if that is worth more than the interest I will save” by paying extra off her $86,000 mortgage.

Firstly, well done Jill! Too many people, when they’ve paid off a loan, just spend the extra money. And with three children to take care of, and not a huge income, Jill could surely use the cash. But if she’s used to managing without it, it’s a terrific idea to use the money to get ahead.

So what’s it to be: KiwiSaver or the mortgage?

Readers might remember that last month I told Anne to weigh up the interest rate on her mortgage and the return she might get from putting extra into KiwiSaver. Even though the average KiwiSaver return might be higher, it’s volatile, so many people prefer to concentrate on paying down their mortgage.

But for Jill it’s different. While Anne is already contributing enough to KiwiSaver to receive the maximum government contribution, Jill isn’t putting in anything.

That means that for every dollar Jill contributes she’ll get 50 cents from the government — up to $1042 a year from Jill and $521 from the good folk in Wellington.

Because of that turbo-charging — Jill’s money is multiplied by 1.5 for contributions up to $1042 — it’s pretty much impossible to beat investing in KiwiSaver when you compare it with other investments with similar risk.

There’s a timing issue here too

The KiwiSaver year runs from 1 July to 30 June. To get the full $521 from the government this year, Jill needs to contribute her $1042 by 30 June 2020. So I recommend she contributes $200 a month into KiwiSaver from now on.

But after next June 30, things change. Jill has a whole year to get her $1042 into KiwiSaver. And while she expects to pay off her mortgage by 2027, but it would be great to pay it off sooner.

In light of that, I suggest that from next July she contributes $87 a month to KiwiSaver — which will get $1044 into her account each year. The other $113 a month could go into speeding up her mortgage payoff.

Footnote: When Jill turns 65, things change again

She will start to get NZ Super, stop getting the government’s KiwiSaver contribution, and can withdraw her KiwiSaver money — which currently totals $56,000.

At that point, I suggest she blitzes the mortgage with most of her KiwiSaver money and Super payments.

Once the mortgage is paid off, Jill will have the spare $200 a month, her Super, and what used to go into the mortgage to save — and also to spend a little. She deserves a few treats!

Ask Mary

Have a question or concern about saving or investing for Mary? Email [email protected], subject Money. Letters cannot be answered personally. If your topic is chosen you will receive a copy of Mary’s book, Rich Enough? A Laid-Back Guide for Every Kiwi.

This column is supported by the Financial Markets Authority to encourage women to take an interest in KiwiSaver and investing. Visit fma.govt.nz for more information. Mary’s views do not necessarily reflect those of the FMA.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.