I was in my last year of university when I opened my KiwiSaver account in April 2008. At the time, we were still in the midst of a global financial crisis, KiwiSaver was still very new, and I hadn’t had much exposure to investing. Needless to say, optimising my KiwiSaver investment wasn’t big on my radar!
Today, the KiwiSaver landscape has evolved and, as a financial adviser, I’ve spent years thinking about KiwiSaver and talking to clients about their investments.
I’ve been reflecting on the journey, and what I wish I’d known when I first started investing. With the benefit of hindsight, experience, and some financial education under my belt, it’s easy to see how I could have achieved a better outcome – and sooner.
Lesson 1: The ‘default’ option might not be the best option
Like many others, I didn’t make an active choice of KiwiSaver provider or fund when I first joined. Without any investing know-how (or frankly, at the time, much interest), I naively assumed the ‘default’ fund I was automatically invested in was the best option. This left me, at the very beginning of my career, in a conservative KiwiSaver fund with limited growth potential.
With more than 40 years until retirement, I had the ability to tolerate many ups and downs in my investment along the way. Investing in a growth fund could have taken advantage of this and provided me with a better return.
Today, a KiwiSaver default fund is a more moderate balanced fund which should grow faster than a conservative fund over the long term. However, a balanced fund still isn’t the best option for everyone, and choosing the right fund can make an enormous difference to retirement outcomes. There is a wide variety of advice and resources to help KiwiSaver members choose their best strategy. If I was in that situation now, I would use these resources to set myself up for higher risk, potential higher growth, and ultimately, a better outcome.
Lesson 2: Time is a valuable asset
Working a part-time job, I knew it would take a very long time for my KiwiSaver contributions to build up into a sizeable nest egg. That made me feel like they weren’t important.
What I didn’t realise is the power of time when building wealth. While my contributions were small, the value of the time I had to remain invested was worth a lot. That’s because, over time, as your KiwiSaver investment grows, you can earn a return on top of your investment returns – not just on the contributions you’re making. This is the compounding effect legendary investor Warren Buffett refers to as ‘the most powerful force in the universe’.
Here's an example of a person aged 45 who is just starting their KiwiSaver journey. They have a salary of $80,000 and contribute 3%, with their employer also contributing 3%. They choose to invest in a growth fund. By the time they reach retirement age they could have a KiwiSaver balance of about $125,000. Compare this to someone who started their KiwiSaver journey earlier at age 25, with the same salary and contribution rates. That person could have a much larger potential KiwiSaver balance of about $360,000 at age 65. * That’s almost three times as much as the 45-year-old!
If I knew then what I know now, I’d recognise the importance of starting early and trying to make the most of that growth potential by choosing the right fund and even adding in small extra contributions if I could.
* Calculated using the Fisher Funds retirement projector – learn more about the assumptions used
Lesson 3: Don’t take a break from contributing unless it’s absolutely necessary
One final thing I could have done differently was to make a plan for my KiwiSaver when I left New Zealand for my big OE. With all the distractions of exploring and building a career overseas, sending money back home wasn’t top of mind. So, while my KiwiSaver continued to be invested and earn returns, I missed out on the power of those small contributions that add up and compound over time.
While KiwiSaver members won’t get the benefit of government contributions for the time they’re living overseas, continuing to make some contributions to your KiwiSaver account helps to keep your investment on track for goals that may suddenly seem more important once you are back – like buying a first home or planning for retirement.
Knowing what I know now, my KiwiSaver account is set up in a better way for me and my ambitions. But if I’d had that same knowledge back then, I could have achieved my goal sooner and potentially have a bigger nest egg at retirement.
The good news for KiwiSaver members is that it’s really easy to review your KiwiSaver account and check you’ve got it set up in the right way for you. Most providers have financial advisers who you can talk to and useful tools on their websites to help you choose a fund or see the difference some small changes can make to your retirement savings.
Got questions?
We have a team of friendly Investment Advisers who can check you’ve got your KiwiSaver set up in the best way to help you reach your goals. You can drop us an email, call us on 0508 347 437, or chat with us online.
