Kiwisaver works hard for those at all ages and stages

Early decisions make a big difference, says Tim Fairbrother.

Seek advice, as your fund may not provide the best returns to help you meet your retirement goals.

In October 2007, the Government introduced Kiwisaver, and to date, more than 2.6 million Kiwis are enrolled in the fund, with more than $35 billion already invested and growing at a rate of $3b per quarter.

But it seems that many people are still unsure of how much money they will need for retirement. Nor do they know what fund they’re invested in, or whether it’s an appropriate fund for their stage of life.

Making good financial decisions now will determine how well you can provide for yourself and your family in the future. It’s therefore vital that you have a good handle on your financial situation and seek help that is tailored specifically to the needs of you and your family.

The following client examples are fictitious but the issues are real to all Kiwis.

David and Aroha

David and Aroha are in the process of joining Kiwisaver. David was going to contribute 8 per cent of his wages and Aroha 3 per cent.

However, David has since reduced his contribution to 3 per cent after seeking advice from his financial adviser.

A 3 per cent contribution matches his employer’s contribution to reach the $1042 threshold and therefore makes the most of the Government’s member tax credit. David should direct the remaining 5 per cent of his wages towards his mortgage to reduce their debt faster, and save on interest.

Aroha earns $30,000 per year and will need to top up her 3 per cent contribution by a small amount of $12 per month, to take advantage of the maximum member tax credit.

David and Aroha were unsure what fund to invest with Kiwisaver. Their financial adviser encouraged them to complete a risk profile form to figure out what type of financial risk they were willing to take.

As a result, they were recommended a balanced growth fund, given their long timeframe. This fund includes investments of different risk levels that a fund manager can change to suit market swings. It invests mainly in shares and listed property assets, with some exposure to cash and fixed interest assets.

Top tip: Seek advice and make an informed choice to ensure you make the most of your investment, as your fund may not provide the best returns to help you meet your retirement goals

Martin and Stacey

Martin and Stacey didn’t join Kiwisaver until 2009. They were unaware of the benefits until their neighbour told them about the free money from the government.

Because they’re self-employed they don’t contribute a percentage of their earnings the way PAYE members are.

\Instead, Martin and Stacey started off by contributing $87 each per month by direct debit.

This meant they both received the maximum Government tax credit each year and by spreading out their contributions they also balanced their risk to fluctuations in the market.

As tempting as it may be to pay off your personal mortgage first, the cash lump sum from the Government means Kiwisaver offers a 50 per cent return before you’ve even invested.

If instead they chose to pay an annual lump sum, their investment would be more exposed to market fluctuations. For example, a lump sum paid in last June would have fallen 10 per cent with the August downturn.

Now Martin and Stacey are nearing retirement, they’ve increased their Kiwisaver contributions from $87 to $400 each per month.

The fact that they have no personal debt combined with Kiwisaver’s low fees means Kiwisaver is as good a place as any to regularly save into. The downside to this strategy is that Kiwisaver is locked in until 65.

Top tip: Contributing small, regular amounts into your Kiwisaver is much easier on the cash flow than an annual lump sum.

Robert and Marilyn

Robert and Marilyn are enjoying a comfortable retirement. They both joined Kiwisaver when it was introduced in 2007 and received an excellent nest egg when they turned 65.

Financially secure, they are now looking to help their son and daughter-in-law, Matthew and Jo, buy their first home.

Matthew and Jo both joined Kiwisaver five years ago and just received confirmation they qualify for a first-home withdrawal from their Kiwisaver.

This means they are entitled to withdraw all their member tax credits employee and employer contributions including earnings from both of their Kiwisaver accounts, leaving behind the $1000 kickstart.

They’ve also just discovered they qualify for the Kiwisaver Homestart grant from Housing New Zealand.

As their combined income is less than the maximum threshold, they’ve both made regular contributions to their Kiwisaver for three years or more and their house is new (less than six months old), they are entitled to $2000 each for every year they have been in Kiwisaver (to a maximum of $10,000 each).

This means they have an extra and unexpected $20,000 on top of their Kiwisaver funds to put towards their first home.

There are other conditions on the Homestart grant that they need to consider.

Robert and Marilyn have topped this up with an interest-free loan which means Matthew and Jo have a substantial deposit.

Top tip: While Kiwisaver is primarily a long-term retirement fund, make sure your children know about the benefits for firsthome subsidies.

This information is of a general nature and is the opinion of this authorised financial adviser. This is not intended to be personalised financial advice. A disclosure statement is available on request and free of charge.