KiwiSaver: the gift that keeps on giving

by Listener Archive / 16 June, 2012
Employer and government contributions to KiwiSaver make it a better bet than extra mortgage repayments.
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If you saw $2 lying on the footpath, you’d probably bend down to pick it up. And if you could save $5 when buying something at the supermarket by choosing a cheaper option, assuming everything else was equal, you’d select the better value item. Right? These are two ways of thinking about some of the benefits of joining KiwiSaver. For each dollar you save, you get almost another dollar from your employer and another 50c from the government. KiwiSaver literally is a gift that keeps on giving. A friend asked me the other day why she should bother joining KiwiSaver, given her earnings were quite small. Wouldn’t she be better off putting any surplus money into her mortgage if the amount being saved wasn’t significant?

Okay, let’s assume her earnings are $20,000. According to the Fisher Funds website, if she saves the KiwiSaver minimum of 2% of her pay, that’s $7.69 a week, or about the cost of two cups of coffee from a cafe. The beauty of KiwiSaver is that her employer puts in the same amount; the weekly amount saved suddenly goes to $14.04 (after tax deductions). Then the government stumps up with another 1%, or $3.85, through a tax credit. That brings the total saved each week to $17.89. She puts in less than $8 but actually saves a bit under $20. Not bad. Her savings alone total $400 a year, but when she adds in the amounts coming from her employer and the government, it all blossoms to over $900. What’s more she gets a one-off $1000 kick-start from the government just for joining. And if she can manage to save a bit more, she qualifies for up to $10 a week in savings subsidy payments from the government.

That all adds up to a much bigger benefit than she would get by putting the extra money into paying off her mortgage more quickly. Although reducing debt is generally a good idea, it doesn’t compare with the subsidised returns from KiwiSaver; and that’s not including any actual investment return from her KiwiSaver provider. It just underscores the old saying about small acorns. She might not grow a mighty oak tree-sized fortune, but she will accumulate some useful savings to supplement whatever other retirement income she receives. Even at $7.69 a week, if she is 40 now she will have amassed almost $25,000 by the time she is 65 (before any investment returns). That will represent a boost to her income of more than $30 a week, or $1600 a year, if paid as interest. Although it may not seem a huge amount, it could pay for a holiday or the rates bill.

From next April, the minimum contributions of both individuals and employers will rise to 3%, so these numbers will change and her savings will be greater. However, if she puts the $7.69 into her mortgage, she doesn’t get the extra contributions or tax benefits. At a time when the economy is depressed and there is not much wage growth, finding the money for savings can be hard. But it is a no-brainer to cash in on such a subsidy if you possibly can. The other point about saving even small amounts with KiwiSaver is that it gets you into the habit of thinking about your future and putting money aside. There are those whose incomes are just too small – where literally every dollar matters – to make saving a viable option. But for most people, even a little bit of saving can make a big difference. And it’s amazing how you can boost that amount by practical little steps.

I have another friend who’s been saving for an overseas holiday. She’s been putting gold coins away every time she receives them as change and it’s surprising how they mount up. It might sound like an old-fashioned piggy bank (and it is), but if it works, don’t knock it. And you never know – you might find the odd $2 lying on the ground.
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