Make 2021 the year you sort, your KiwiSaver
Susan Edmunds, Jan 06 2021
KiwiSaver has been around for more than a decade and has become part of most New Zealanders’ financial lives.
The scheme has been far more successful than was initially expected in getting increasing numbers of New Zealanders saving for retirement.
But where it has not been so successful is in the amount that members are contributing or how they are doing it.
Too many New Zealanders still aren’t contributing enough – or at all – and a large number remain in the default KiwiSaver scheme they were placed in when they signed up.
If you are wondering whether you are getting the most out of the scheme, there are a few things you can check.
Your first task is to determine what you are hoping to achieve through your KiwiSaver investment.
Are you saving for retirement or a first home? Is it part of a wider investment portfolio or are you expecting your KiwiSaver account to provide the bulk of your income in retirement? The answers to these questions will help determine what settings will be best.
You can choose to contribute 3 per cent, 4 per cent, 6 per cent, 8 per cent or 10 per cent of your pay to your KiwiSaver account each payday.
If you have not chosen one of the higher levels, you will have defaulted to 3 per cent.
You can also make voluntary contributions if you are not earning a salary or wage, or if you want to put a bit more aside.
Most providers offer online calculators that help you work out what sum you are on track to save, either for a first home or retirement. If you find that you are set to amass a lower amount than you would like, you can increase your contributions.
It makes sense to always contribute at least the $1042 that entitles you to the Government’s $521 tax credit each year, and an amount equal to whatever your employer will match. Beyond that, how much you contribute will depend on the rest of your financial plan and those goals you worked out earlier.
Contributions made early in your KiwiSaver investment life have the most power because the returns on that money compound year after year. That means it is important to get on track early rather than waiting until you are closer to retirement to think about saving.
The earlier you start, the less of your own money you have to put in to achieve a good outcome.
All providers offer a range of funds to suit investors’ different circumstances (they refer to this as a risk profile – your ability to take some risk with your money).
You might choose a conservative fund if you need the money soon or a growth one if you have a long time until you will withdraw any cash.
Some providers also offer funds that target specific areas or types of investment.
If you have not made a choice, it is likely that you are in a conservative default fund. While this is fine for protecting the money you have invested, it may not be such a good option over the long term.
Conservative funds tend not to wobble with the markets to the extent that growth funds do. But they also do not provide the same returns over time.
Growth funds have more invested in things like shares and tend to fall further when markets are volatile. But then they recover harder and faster. This was evident in early April when markets recovered strongly from a steep March fall.
Investors who were spooked by the drop shifted out of their growth funds and missed out on the recovery.
It has been estimated that someone on an average income with 40 years in KiwiSaver could be hundreds of thousands of dollars better off in retirement in a growth fund than a conservative one.
As of this year, KiwiSaver default funds will become balanced funds, which take a bit more risk. If you do not make any other choice, your funds will be moved.
As mentioned before, compounding makes a big difference so the sooner you can get into the right type of fund and start maximising your returns, the better.
If you are not sure what the right sort of fund for you would be, check out sites such as Sorted or your provider’s own online tools. Many now also offer digital advice services to help you ensure your money is in the right place.
While all KiwiSaver providers are working with similar parameters, there are differences.
Default providers are chosen by the Government to receive the investments of people who have not made an active choice. They will soon have extra responsibilities, including a need to avoid fossil fuels in their default funds.
You can choose to have your KiwiSaver account with your bank or with another entity. Providers have a range of investment styles and you will need to decide which is a good fit for you.
Some investors like active managers, who make decisions designed to maximise client returns. Others prefer a passive model, where funds track market movements, because of the lower fees that often go with them.
Some providers offer sophisticated online platforms while others are more no-frills. Check out a few and what they offer. Sorted provides a Fund Finder tool that might help your decision and the Financial Markets Authority offers data that shows the relationship between providers fees and returns.
If you can set aside a few minutes to ensure your KiwiSaver settings are correct, you will thank yourself for it later.
!!!!!Remember Marys great column in the NZ Herald!!!!!