This article was published on 4 March 2008. Some information may be out of date.

What a difference a year or two makes

Most people have lists — either written or in their heads — of things to do, and certain items never seem to make it to the top. If one of those is to join KiwiSaver, push it to Number One promptly. Delay is probably costing you much more than you realise — unless you are 60 to 64.

Not sure which fund to invest in? I suggest you sign up in a fairly conservative fund, with practically any provider you feel comfortable with — with the idea of moving later.

Being in a less than ideal fund for a couple of years generally makes surprisingly little difference over the long term. But being out of the scheme altogether makes a surprisingly big difference. We’ll look at that last idea first.

The cost of staying out of KiwiSaver is highest for the young, but it’s still considerable for people in their fifties. In the following examples, our man currently earns $50,000 a year, with 3 per cent pay rises each year. He contributes 4 per cent of his pay to KiwiSaver, and his KiwiSaver fund earns 5 per cent a year after fees and taxes.

If he is 18 and he joins KiwiSaver now, he will have a whopping $165,200 more at age 65 than if he delays joining for just two years. True, that money will be worth less by then. But with 2 per cent inflation it will still buy what $64,000 buys today.

If our person is 30, he’ll save $84,300 more if he joins now rather than in two years. At 40 it will be $48,100 more, and at 50 it will be $25,400 more — or $19,000 after adjusting for inflation.

Why such huge differences for just two more years of membership? Because savings tend to grow by a bigger margin each year.

If our 18-year-old doesn’t join KiwiSaver until 2010, he will accumulate about $1.27 million by 65. But if he joins now, he’ll get two more years of growth on that big total — as well as two more years of contributions from himself, his boss and the government. That brings him to more than $1.43 million. It’s powerful stuff.

The situation is different for those 60 to 64. You will receive government contributions and compulsory employer contributions for five years from whenever you join. And because employer contributions rise every year until 2011, you might want to stay out of KiwiSaver until then, to get the best five years out of your employer.

However, for this to work well you need to be confident you will keep working for five years from your joining date. If that’s unlikely, get in as soon as possible, to maximise your years of employer contributions. Note, too, that whatever else happens you must sign up before you turn 65.

How come delaying joining KiwiSaver for two years matters a lot, but being in the “wrong” fund for the first two years doesn’t?

As we’ve observed, in the last two years before you turn 65 you’ll get growth on big numbers. But in the first two years you’ll have just a few thousand dollars in KiwiSaver. If growth in your fund is low — or fees are high — the dollar amount of your returns won’t be much lower than in a better fund.

That’s not to say it doesn’t matter over the long term. Lower returns over the decades make a huge difference. But once you’re in KiwiSaver, you’ll find yourself learning more about investing. When you feel more confident, you can easily move to a more suitable KiwiSaver fund.

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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.