What is KiwiSaver and how does it work?
By now most Kiwis will have a good understanding of what KiwiSaver is – it’s a voluntary long-term savings scheme designed to encourage people to save and invest for retirement. But for many people, they’re not sure if they’re getting the best performance they could. Read on for a brief guide to some of the key decisions you need to be thinking about in 2024 – how much you’re contributing, which KiwiSaver provider you should use, and which fund you should be choosing.
How much should I be contributing to KiwiSaver?
If you’re employed, your KiwiSaver contributions are deducted directly from your pay at a contribution rate of either 3%, 4%, 6%, 8%, or 10% of your before-tax pay. These will be matched by your employer at a minimum of 3%, although in some cases your employer may offer to match at a higher rate. In addition to your own and your employer’s contributions, the government also contributes to your KiwiSaver account through an annual Member Tax Credit. This credit is up to a maximum of $521.34 per year, depending on the amount you contribute to your KiwiSaver account.
If you’re unemployed or self-employed, you’ll have to contribute to KiwiSaver voluntarily. You can do this at any rate you like – your provider will be able to give you details on how to do this.
As a general guide, we suggest that if you’re employed, you contribute to KiwiSaver at least enough to maximise the amount your employer will contribute. For example – if your employer will match up to 4%, then contribute 4%. If they only match at the required 3%, then make sure you’re at least putting in the minimum of 3% too.
We recommend that if you are unemployed or self-employed and are able to save, then you at least contribute enough on a voluntary basis to earn the full Member Tax Credit. In 2024, thats a minimum of $1024.86 per year. You can contribute on a regular basis or all in one lump sum, as long as it is received by the 30th of June each year.
These are guidelines only and may be different for certain people – for example, if you’re close to age 65, or you’re wanting to use your KiwiSaver funds to buy a new home in the near term. Drop us a line for a chat if you want specific advice on your situation.
Where should my KiwiSaver investments be going?
The money you (and your employer) contributes is invested with a KiwiSaver provider of your choice. Funds are invested by your KiwiSaver provider in a range of assets such as shares, fixed interest, and property, depending on the investment strategy or fund you’ve chosen. If you don’t actively choose a provider or fund when you join KiwiSaver, you’ll be assigned to a “default” provider at random – making an active decision on how your KiwiSaver funds are invested is one of the most important financial decisions you can make in the long term.
Your asset allocation strategy is the most important decision when it comes to long-term KiwiSaver performance. When you’re choosing a type of fund – conservative, balanced, or growth, for example – you’re making an asset allocation decision. A higher allocation to equities (such as in a growth fund) generally leads to higher long-term performance, at the expense of short-term volatility, but if you’re investing for retirement and retirement is a long time away, then short-term movements in the value of your investments don’t matter as much. A higher allocation to fixed income and cash (such as in a conservative fund) may provide more stability and lower short-term volatility, but it may also lead to lower long-term returns. This might be appropriate if you’re nearing retirement, or you are planning to use your KiwiSaver funds for a first house deposit, but will probably cost you significantly lower returns in the long run.
So, when choosing your asset allocation strategy, it’s important to consider your time horizon. If you have a long time horizon until retirement and can tolerate short-term market fluctuations, a higher allocation to equities in a growth fund may be appropriate. However, if you have a shorter time horizon, a more conservative allocation to fixed income and cash may be more suitable.
It’s also important to review and adjust your asset allocation strategy periodically as your circumstances change. As you get closer to retirement, you may want to gradually shift your allocation towards more conservative investments. It’s always a good idea to seek professional financial advice to help you determine the most appropriate asset allocation for your individual situation.
Which KiwiSaver provider should I choose?
When it comes to choosing the right KiwiSaver provider, factors such as asset allocation, fees, and the provider’s investment philosophy are highly important. Things to consider:
- What asset allocation does the provider use in their conservative, balanced, and growth funds? There can be significant variation from provider to provider in how they invest in, for example, their respective growth funds. Some can allocate 90% or more to equities, while others may be as low as 70%.
- What are their fees? Over time, generally speaking, lower fees will lead to a higher balance. Research has shown consistently that the higher costs and fees of active portfolio management generally aren’t worth any improvement in investment performance they bring, and most of the time they can in fact hurt performance. We generally prefer KiwiSaver funds that offer a low average cost over time.
- What investment philosophy does the provider follow? Are they actively managing their investments or do they prefer a more passive style? How heavily do they use alternative investments such as private equity, unlisted investments, or alternative investments? Do they have a strong environmental, social, and governance focus in screening investments? How do their investment decisions align to your investment and personal preferences and values?
When it comes to maximizing your KiwiSaver investment in 2024 you should stay informed about factors that can affect your investment performance, but not be too reactive to them. If you’re investing over a multi-decade timeframe, then movements in markets in 2024 won’t be that important over the long term. Factors such as economic growth, interest rates, investment trends, and geopolitical events can affect your balance, but keep in mind, if you’re contributing regularly, then lower markets means you’re buying in at a lower price.
Planning for retirement with KiwiSaver
Planning for retirement with KiwiSaver involves setting clear retirement goals and utilizing the scheme to achieve these goals. KiwiSaver can also be used to save for a first home deposit, with the potential to access your KiwiSaver funds to put towards purchasing your first home. Building an effective KiwiSaver portfolio involves assessing your risk tolerance, investment time frame, and diversifying your investments across different asset classes to ensure long-term growth and stability.
It’s important to keep these factors in mind when planning for your retirement and to regularly review your KiwiSaver account to ensure it aligns with your long-term financial goals. It’s also worth considering financial advice, conducting thorough research, and monitoring the performance of your KiwiSaver investment regularly to ensure it aligns with your long-term growth objectives.