Lazy way to grow your KiwiSaver

If someone told you there was a way you could get other people to do 70 per cent of the work to get to your savings goal, you probably wouldn’t hesitate to jump at it.

But many KiwiSaver members are giving away the opportunity to do exactly that.

Fund manager Milford Asset Management has run some numbers looking at the factors that contribute to a KiwiSaver member’s final savings outcome.

It highlights a problem that has become apparent with the scheme. People get stuck on the ‘‘saver’’ part of the name, and think of it as just another savings account.

With a savings account, what you get back is pretty much determined by what you put in, with a bit of interest on top.

But KiwiSaver is actually an investment vehicle, and what you get out depends a lot on what type of assets your money is invested in.

Murray Harris, head of KiwiSaver and distribution at Milford, said a 35-year-old who joined KiwiSaver contributing 3 per cent plus an employer’s 3 per cent and the Government member tax credit each year could end up with 70 per cent of their financial KiwiSaver balance being the result of investment gains, not the contributions they made.

That means, for every $3 a person put in over their working lifetime, they could amass another $7 thanks to the performance of the assets their KiwiSaver was invested in. But still many people are missing out.

Milford’s research shows 80 per cent of KiwiSaver members have 10 years or more until they retire, and so should have exposure to growth assets, such as shares.

But only 37 per cent of all KiwiSaver money is in growth and aggressive funds.

It’s hard to accurately make comparisons years into the future, but David Beattie, of KiwiSaver provider Booster, has estimated the difference between the final outcome of a growth and conservative fund over a 40-year working life could be as much as $400,000.

He said a 25-year-old earning an average wage who stayed in a conservative fund for 40 years could save about $375,000 over their lifetime, compared to someone in a high-growth fund who could end up with $835,000.

The returns you get at the beginning of your investment career have the biggest impact. In fact, if you contributed for the first 10 years of your working life and then stopped, you could still end up better off than someone who started investing hard in their 40s.

That’s because the effect of compounding amplifies those early returns, year after year. Each year, you earn returns on the returns of the year before.

But many people do not realise their investment allocation is wrong until they get to the point where they start taking retirement (or first-house) saving more seriously.

By then a big opportunity has often been missed.