Hannah McQueen is a financial adviser, chartered accountant, personal finance author and the founder of enable.me – financial strategy and coaching.
OPINION: Kiwis have taken to KiwiSaver with gusto since the scheme was launched in 2007 – more than 3 million of us now in the scheme.
While there are definitely some gaps in Kiwis’ knowledge of how it works (and in our general attention to how it’s invested) we seem to understand the basic principles of what makes it worthwhile. That is, you put in at least 3%, your employer matches that, and as long as you contribute $1,042.86 a year, you’ll qualify for the maximum tax credit from the Government of $521.43 a year.
But what I find many people fail to grasp is just how illiquid those funds are. The only circumstances in which you can (generally) withdraw your funds are: to buy your first home to live in, if you’re declared bankrupt, you reach 65 – or you die (in which case they’re not much use to you!)
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I frequently meet with people who are contributing much more than 3% and want to know “is that a good idea?”.
The answer to that, like most personal finance questions, is an annoying: “it depends”. But more often than not, I conclude it’s not the best option.
It’s not that you shouldn’t be saving and investing more than 3% of your income for retirement – you definitely should. The question is: is KiwiSaver always the best place for those savings?
If your employer will match contributions over and above 3% – and you can afford those extra contributions – then the answer is more likely to be yes. That’s because your employer matching those contributions provides a pretty unbeatable return on your investment – before it’s even generated any investment returns.
If your employer doesn’t match above 3%, then reaching an answer requires a bit more detail. How big is your mortgage and what would the return be on directing more to repaying it faster? The higher your mortgage interest rate, the greater the case for prioritising debt repayment, as the return on your KiwiSaver – after fees and tax – needs to be comfortably higher than your interest rate for it to be the preference (and you need to remember saving interest on your mortgage is a risk-free return, unlike other investment returns).
That’s before you layer in whether you could invest the equity that faster debt repayment unlocks to grow wealth elsewhere using leverage – which is often something those who have big retirement gaps or a short runway to retirement need to consider.
If you’re trying to secure lending, higher contribution rates can affect your capacity to borrow. If you’re an investor trying to settle on a property that you went unconditional on some time ago, changes in lending conditions or valuations can impact that – cash can help protect your ability to settle, your KiwiSaver will not.
If you don’t have a buffer in your personal finances, that is, access to funds that could tide you over if your income stopped or you needed to cashflow your business temporarily, then I’d also argue you shouldn’t be contributing extra to KiwiSaver until you do. The past few years have shown that even in tough economic times, KiwiSaver funds remain remarkably difficult to access.
But what if you’re a first-home buyer, shouldn’t you go hell for leather, ploughing money in as fast as you can? Potentially, but again there are circumstances in which I’d advise caution.
Buying a home to live in isn’t always the best option – or even a realistic option – for first-time buyers. If you put all your property funds into KiwiSaver but then want or need to invest in something more affordable first – tough luck, those funds are not available unless you’ll live in the property for at least six months.
If you’re ploughing your money into KiwiSaver because it’s locked up and you fear you’ll otherwise spend it, then perhaps we need to address your financial management and behaviours, rather than introduce the risk of illiquidity to your finances.
KiwiSaver has some excellent benefits and can be a useful tool to both save for a home and save for retirement – but it’s seldom sufficient for retirement on its own, and care should be taken to ensure you have the liquid funds and flexibility to both survive today and grow wealth for tomorrow.
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