KiwiSaver
Shivan

Shivan

Kiwisaver King: Step 5 of 8 to Financial Security

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Setting up your KiwiSaver is the easiest way to improve your financial security.

If you have been following the series so far, you would have:

  • an organised budget
  • a secure system
  • an excellent emergency fund, and
  • demolished debts

Time now to become a KiwiSaver king. By the end of this post, you will earn your crown. We will learn about KiwiSaver, why you should have KiwiSaver, and how to set it up so you can become royalty later on in life.

What is KiwiSaver?

“A voluntary retirement savings scheme to help you save for your future”

—From Aotearoa Te Tari Taake1

Introduced to Aotearoa New Zealand in 2007, KiwiSaver (KS) secures your financial future by helping you:

You can choose to contribute 3%, 4%, 6%, 8%, or more recently 10% of your before-tax pay into your KS fund. If you are employed, your employer will match up to your 3% contribution (or more, depending on your contract).

Additionally, for every dollar you contribute, the Government will contribute 50 cents. The Government contribution is capped at $521.43, which is deposited annually and is known as the member tax credit.

All this money is pooled together into a fund. The money in this fund is put to work in a variety of investments chosen by your KS provider. These investments can be international shares, bonds, property, etc. all aiming to make you more money than what went in.

Who is eligible for KiwiSaver?

You are:

  • You are over 18 (if you are 16-17, you must enrol using a provider and have one guardian co-sign; if you are under 16, then all guardians must consent)
  • Have a right to live in New Zealand (i.e. New Zealand citizen or resident, not on working, visiting, student, temporary visa)

Most of you reading this, if not already in KS, will be eligible.

How do I get KiwiSaver?

Most of you will be members of KS, but in case you are not, signing up is very simple:

  • When you start full-time employment or permanent part-time, you will be automatically enrolled unless you actively opt out.
  • You can apply through the list of KS providers with no extra cost.

How do I check my KiwiSaver?

Using the online IRD portal, you will be able to check your KS provider. A quick web search of your KS provider, and from there, you can log in and check your balance.

When accessing the IRD website, a RealMe® account can be handy for logging in. Other than that, make sure you have your IRD number with you.

The KS providers will have methods of recovering your login details in case you do not know or have forgotten.

What if I am Student or Self-employed?

Enrolling with KS is a good idea, even if you have never had employment or are not working full-time/part-time.

And why would that be? Well…

Remember the Government contribution? The free $521.43 per year. You only get this if you contribute $1042.86 between the 1st July to 30th June the year next (given you are over 18 and under 65). That works out to be roughly $21 per week for the year.

For a full-time job at minimum wage for the year, you will easily make this quota of $1042.86 per year.

For those who are in part-time roles or not taking on income for the most part of the year, then likely you won’t be meeting this contribution. That means you will be missing out on some free money.

Similarly, if you are self-employed, you will have to be responsible for your own KS contributions.

If you are in any of these situations, then voluntarily depositing $21 per week into your KS provider account will make sure you reach the contribution you needed to gain the full Government offering. The KS provider will have a method of depositing voluntarily. Another method would be to put $21 away into a separate bank account and then depositing it before the 30th of June.

$21 is a small sacrifice. The gains that can be made in your KS go beyond the free money you get from the Government. We will cover this a little bit later. Once again, this will help you make that first-home deposit or with retirement later on, where the key is to start early.

Even if you cannot afford the $21 per week of the $1042.86 per year, putting in something is better than nothing.

How do I set up my KiwiSaver for success?

We are going to do this in two steps:

  1. Select the best risk-level for you
  2. Picking the right KiwiSaver provider

Step 1: What is the best risk-level to be in?

Generally, there are three risk categories (sometimes more) to choose from:

  • Growth (highest risk)
  • Balanced
  • Conservative (lowest risk)

A growth fund invests more into high-risk investments such as shares in a company or a property index. These provide a greater return on average, over time. What is important is over time. High risk-level is at the mercy of greater fluctuations, your balance may drop significantly next week, next month or next year. However, over time (10+ years), your fund will experience greater returns than in lower-risk level funds.

The opposite would be the case for a conservative fund. The lower risk fund will invest in low-risk investments like bonds and cash. Fewer fluctuations will be experienced. So, a drop won’t be as significant compared to a being in growth fund but there will be less return over time.

A balanced fund as its name suggests is mix of both high risk and low risk investments.

So the question comes, what risk level should I choose?

Personal finance is personal. To answer this question, you need to know:

  • the logical aspect of when you will be accessing your KS – the sooner, the less risk
  • the emotional aspect of how much of a drop in fund you can tolerate – a lot, then high risk

Avoiding looking at your KS balance, allows you to be rational about the decision you make on what risk level to choose. If you are going to use your KS to buy your first home in the next 1-2 years, then conservative would be the way to go. 2-5 years, balanced. And 5+ years, growth. The same goes for retirement.

The reason you want to be in a lower risk fund if you going to use your KS sooner is that if there is a crash in the economy, your KS will be less likely to drop compared to a higher risk fund. Dips in your KS happen, you just need to wait longer for your fund to recover. This takes longer in a higher risk fund than a lower risk one.

Step 2: Who is the best KiwiSaver provider for you

Sorted.org.nz has provided an excellent tool to use with this section.

Risk level – check! Now, what provider? There are three factors to consider:

  • Return is the money gained (or lost) in the investments made by your KS provider.
  • Management fee is the cost of managing your money by the KS provider. It is usually an annual fee and/or a percentage deduction of your fund total.
  • Investments mix is what your money will be put into in the hope it will grow with time.

A big mistake is picking the provider with the highest return. Predicting the market is like guessing what your partner wants for dinner. It’s impossible. The KS provider with the best return for the last year was, well, lucky. Thinking a KS provider will repeat their number one performance is the same as believing you will beat the dealer in Blackjack for the third time in a row. Just because you won the first two, doesn’t mean you are at the mercy of randomness. If you are looking at returns, then aim for a provider at least above average over time – but this is not necessary.

If ranking by return is not important, then how do you pick the best? Look at the management fees and their investment mix.

For the service of investing your money, KS providers charge a management fee. The fee can have a huge impact on your KS come retirement, ranging in the tens of thousands of dollars.

For an 18-year-old today, earning a hypothetical wage of $50,000, if they were to switch from a KS provider with a management fee of 2.3% to 0.5%, they would save $65,310 by the age of 65.

Sorted.org.nz provides an excellent tool to compare fees across KS providers.

Next is to look at what your provider’s investment mix. Two things to consider are:

  • Diversification
  • Ethics

Instead of putting all your money into one company, you put it in multiple companies. Instead of putting all your money into the companies of one country’s economy, you put it in multiple country economy. This is known as diversification.

As you know before, risk and reward have an antagonistic relationship. When there is more of one, there is less of the other. Diversification is the only way to reduce risk but still maintain your level in return.

Let’s put all our eggs into one basket. Investing in a single company can give you returns as high as +60% or as low as -40% – an average of 10% returns. Now, let’s put our eggs into multiple baskets. We spread our investments over many companies across different countries and we experience returns of +30% to -10% – still averaging %10.

By diversifying, you may not experience the huge returns but your also don’t experience the huge drops as well. You still get the same returns on average, less risk for same return. Our only free lunch. In the case of a single company’s or single country’s economic collapse, your investments are still strong with other companies and countries.

Ethics is another important consideration. Once you have selected the right KS providers, you will have to check each one out. Some investments may include weapons manufacturers or tobacco companies. Ask yourself: is what these KS providers invest in align with your values? Personal finance is personal, so this is a question that only you can answer.

How do I change providers?

Changing providers is simple and involves no cost and little time.

Now that you have selected the right KS for you. Head to their website. All they need is your identification through a passport or driver’s license and a proof of address.

The transfer of funds between providers usually takes 30 days.

How much should I contribute 3%, 4%, 6%, 8%, or 10%?

For most, contributing more won’t add any more benefits. Most employer only have to contribute a minimum of 3% and there is no match for your contribution. However, this depends on you.

If you empty your bank account on the regular and you are trying to save for retirement or your first home, then a higher contribution, if you can afford it, would be a good idea. This stops you spending your money and locks it away into a KS.

Another reason to contribute more is if you work part-time and are wanting to make the minimum to make the maximum Government contribution.

Conclusion

KiwiSaver (KS), introduced in 2007, helps kiwis save for retirement. Regular contributions from your salary as well as the employee and the Government grow a nest egg that can also be used to buy your first home.

If you are over 18 and have the right to live in New Zealand, then you are eligible for KS. Your employer can automatically enroll you in KS. You can also approach a KS provider.

Even if you are not working full time, then depositing $21 per week into your KS will ensure you get the maximum government contribution every year. If you can’t afford this, then something is better than nothing.

Selecting your KS provider is based on your desired risk level, fee, and investment mix. Returns are generally not reliable as good performances are difficult to repeat. Your risk level will depend on when you are planning to use your KS, and a low management fee is what the aim for in a KS provider.

Changing providers is as simple as easy as sending an email with a few documents attached.

After reading this, you are crowned a KiwiSaver king! I hope you found this helpful, and if you did please comment and share this with friends and family as well. Thank you for reading.

Finally, as a disclaimer, I am not a financial expert or professional. I would encourage you to do your own research or seek an expert opinion. All decisions are up to you.

References
  1. KiwiSaver – New Zealand Inland Revenue – website accessed 17 July 2020[]

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