The Investor 8 July 2008

This article was published on 8 July 2008. Some information may be out of date.

Several readers aged 55 to 64 have asked what KiwiSaver holds for them. The answer is “heaps”. The scheme is particularly attractive for this age group for two reasons:

• Unlike younger people, you are not tying up your money for many years.
• The average returns on the money you put into KiwiSaver are really high — and considerably higher than for younger people investing in the same fund.

The explanation for that is a bit tricky. Everyone’s KiwiSaver contributions are boosted by government and perhaps also employer contributions in the year the money goes in — often doubling and sometimes even quadrupling your money. That’s great.

But after that, each year’s money sits in the KiwiSaver fund earning whatever the fund earns, perhaps somewhere between 2 and 8 per cent after fees and taxes.

Meanwhile, the next year’s money is being boosted as it goes in, but after that it too earns an ordinary return. And so on, with each year’s contributions.

The younger you are, the more years of ordinary returns after the initial boost, which waters down the total return. Everyone still does really well, but younger people don’t do quite as well.

While other KiwiSavers get access to their money at NZ Super age, if you join after your 60th birthday, you can’t withdraw money until you have been in the scheme for five years. For example, a 64-year-old won’t gain access until he or she is 69.

And while for everyone else the tax credit, $40-a-year fee subsidy, first home subsidy and compulsory employer contributions stop once they reach NZ Super age, those who join after 60 will keep getting the incentives until five years after they sign on.

Note that the day you turn 65 you are ineligible to join, so 64-year-olds should make sure they get in while the going is good.

How much money is in it for you? If you are a non-employee you can contribute nothing, and receive the $1,000 kick-start and subsidy. After five years you should have somewhat more than $1,000. Not bad for no input from you.

But it’s much better to contribute up to $1,043 a year, which will be matched by the government. At $1,043, if you are in KiwiSaver for five years, you will have put in $5,215 and the government $6,415. If you invest conservatively, getting say 3 per cent a year after fees and tax, you’ll end up with about $12,300.

That’s terrific. If you were saving the same amount without the government’s help, you would need a return of more than 36 per cent a year to get to $12,300.

Employees do even better, as they also receive employer contributions. An employee on $25,000 contributing 4 per cent of pay for five years would accumulate about $16,300 in our conservative fund. An employee on $100,000 would accumulate $45,500.

KiwiSaver is such a good deal that it’s well worthwhile to dip into other savings, if necessary, to make your contributions.

Why do I assume you’ll invest in a conservative fund? You have only five to ten years before you can spend your savings, and there’s a fairly big chance you’ll lose some money in a riskier fund over such a short period.

However, if you don’t plan to spend your KiwiSaver money until later in retirement, or you have plenty of other savings, you might try a riskier KiwiSaver fund.

When you get to the point where you can access your money, you can keep contributing, stop, or take money out — in a lump sum, as steady income, or a bit of both. It’s your choice.

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.