How Kiwisaver works 

An aging population can put a strain on an economy. The more elderly people a country has, the more tax has to go towards superannuation. People often either put off saving until it’s too late, or underestimate the amount of money they will need to retire comfortably. The New Zealand government’s solution was to bring in Kiwisaver in 2007.

Kiwisaver is a voluntary government operated scheme where part of a person’s wage is invested every pay day until their retirement. When you start a job you will automatically be placed in Kiwisaver, but you are free to opt out. While in Kiwisaver your employer must also make contributions toward the balance. Once you reach retirement age (currently 65) you are eligible to withdraw your Kiwisaver balance (as long as you have been in Kiwisaver for 5 years already).

Kiwisaver at a glance :

  • You can choose to contribute 3%, 4%, or 8% if your pay
  • Your employer will contribute an additional 3% (not taken from your pay)
  • You can pick from any Kiwisaver provider (there are a range of different banks and investment providers)
  • You can pick from defensive, conservative,  balanced, growth, and aggressive schemes depending on the level of risk you are happy with
  • You can use some of your Kiwisaver to put towards buying your first house
  • The government makes some contributions
  • You can use your Kiwisaver funds in times of financial hardship

I like that Kiwisaver gives Kiwis an opportunity to invest in the stock market easily and relatively safely (disclaimer: there will always be risk with stocks). From my point of view the most importance thing to decide is what you want your Kiwisaver to be invested in, and to make sure the fund that your are in matches your life stage and how comfortable you are with risk.

Put simply the risk level of your Kiwisaver fund is determined by how much of it is made up of growth assets. Growth assets are investments that fluctuate in value a lot in the short term, but will hopefully provide bigger gains in the long term. Growth assets are things like property and stocks. The following from the Sorted.co.nz website is a great explanation:

  Defensive funds hold 0% to 9.9% in growth assets. These are generally suitable if you:

  • Don’t want your KiwiSaver account to ever go down (although there are no guarantees), even though that means your account almost certainly won’t grow as fast, over the long term, as accounts in riskier funds
  • Expect to spend your KiwiSaver money in the next three years

  Conservative funds hold 10% to 34.9% in growth assets. These are generally suitable if you:

  • Are willing to take on some ups and downs in value, and are seeking average long-term returns a bit higher than in a defensive fund but probably not as high as in riskier funds
  • Expect to spend your KiwiSaver money in the next two to six years

  Balanced funds hold 35% to 62.9% in growth assets. These are generally suitable if you:

  • Are middle of the road, comfortable with seeing your account value sometimes fall a little and seeking mid-range long-term returns
  • Don’t expect to spend your KiwiSaver money within the next 5 to 12 years

  Growth funds hold 63% to 89.9% in growth assets. These are generally suitable if you:

  • Are looking for fairly high growth over the long term, and won’t want to switch to a lower-risk fund whenever you see your account balance fall quite a lot
  • Are intending to leave your money in KiwiSaver for at least 10 years

  Aggressive funds hold 90% to 100% in growth assets. These are generally suitable if you:

  • Are looking for strong long-term growth, knowing you will stick with your fund even when your balance falls fast
  • Are intending to leave your money in KiwiSaver for at least 10 years

The last thing is like to note is the fees involved with Kiwisaver. The fees of having someone manage your money can really add up over time. Head to the Sorted Kiwisaver fee calculator to find how much you’ll end up paying, but as an example someone on a $50,000 income who is contributing 3% to a Kiwisaver growth fund could easily end up paying $30,000 in fees over their working life. There is a relatively new company called Simplicity who promises to keep fees low which may be worth looking into if fees are a big issue for you.

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