How to grow your KiwiSaver faster in New Zealand

Why investment growth does the heavy lifting

Play with the calculator for a moment and one thing jumps out. The purple wedge, the growth, ends up far bigger than everything you and your employer ever contribute. That is compounding. Each year your returns earn returns of their own, and over decades that snowball dwarfs the contributions that started it.

Take a 35 year old on $70,000 with $25,000 already saved, contributing 3.5 per cent into a balanced fund. By 65 they are projected to have around $376,000, of which roughly $218,000 is pure investment growth. They personally contributed only about $74,000. The market did the rest. Start younger and the effect is even more dramatic, which is why the choices below matter most for those with time on their side.

Fund choice and your timeframe

This is the biggest lever most people never pull. KiwiSaver funds range from defensive and conservative, which hold a lot of cash and bonds and grow slowly, through balanced, up to growth and aggressive funds that hold mostly shares. Shares are bumpier year to year but earn far more over the long run.

For our 35 year old, switching from a balanced fund to a growth fund lifts the projected balance from about $376,000 to roughly $514,000. That is around $139,000 extra, for a single setting change, because a slightly higher return compounds over thirty years. For a 25 year old the gap is larger still.

The trade off is volatility. A growth fund can fall sharply in a bad year, so the rule of thumb is to match the fund to how long until you need the money. If retirement or a first home is decades away, time smooths out the bumps and a higher growth fund usually wins. If you will need the money within a few years, a more conservative fund protects it. Many people are sitting in a default balanced fund without ever choosing it, which for a young saver often leaves money on the table.

Fees and their long term drag

Fees are the silent drag on every KiwiSaver. They are charged as a percentage of your balance every year, so as your balance grows, so does the dollar amount you pay. A difference that looks tiny on paper is enormous over a lifetime.

In our example, cutting fees from 1 per cent to 0.5 per cent a year lifts the projected balance from about $376,000 to $417,000, an extra $41,000 for paying attention to a single number. Check what your provider charges, and be sure any higher fee is actually buying you something, because most of the time a low cost fund in the right risk category is hard to beat.

Your contribution rate

Putting in more obviously helps, and because of compounding it helps more than the raw numbers suggest. Moving our 35 year old from the 3.5 per cent default to 6 per cent lifts the projection to around $487,000, an extra $111,000, much of which is the additional growth on those higher contributions.

You do not have to leap straight to 10 per cent. A good trick is to lift your rate by one step whenever you get a pay rise, so your take home pay never actually falls. Use the calculator to find a rate you can live with, then set it and forget it. You can check what each rate does to your actual payday with our PAYE take-home pay calculator.

The government contribution

This one is close to free money, and many people miss it. The government adds 25 cents for every dollar you contribute, up to $260.72 a year, but only if you have put in at least $1,042.86 over the KiwiSaver year, which runs to 30 June.

If you are employed on a normal salary you will easily clear that through your pay. But if you are self employed, on a low or part time income, or on a contribution holiday, you may fall short. Topping up your contributions to reach $1,042.86 before 30 June claws back the full $260.72. Over a working life, those top ups and their growth add up to thousands.

Employer contributions

Your employer’s contribution is part of your pay, so leaving KiwiSaver, or being on a long savings break, means walking away from it. If you are an employee, contributing enough to receive the full 3.5 per cent employer contribution is one of the easiest wins there is.

If you are self employed you do not get an employer contribution, but you can still open a KiwiSaver, contribute directly, and claim the government top up. It is well worth doing.

Mistakes that quietly cost you

• Sitting in the wrong fund. A young saver in a conservative or default fund by accident can lose six figures over a career. Check your fund type matches your timeframe.
• Panic switching after a market drop. Moving to a conservative fund after shares fall locks in the loss and misses the recovery. The time to choose your risk level is in calm weather, not a storm.
• Ignoring fees. A percent here or there feels trivial and costs a fortune over decades.
• Long contribution breaks. Pausing contributions forfeits employer and government money and the growth it would have earned.

When you can access your KiwiSaver

KiwiSaver is locked away for the long term, which is the point. You can generally withdraw it when you turn 65. The main early exception is buying your first home, where after three years of membership you can withdraw most of your balance towards the purchase, leaving a small minimum behind. There are also limited withdrawals for serious financial hardship, significant illness, or permanently leaving New Zealand.

Because the money is largely untouchable until 65, it is the perfect place for long term growth, which loops back to the main message of this guide. Set the fund, the fees and the contribution rate well now, and let compounding do the heavy lifting for the next few decades.

Which of these is right for you, and how much risk you should take, depends entirely on your own situation, so treat the list as background for a conversation with your provider or a licensed adviser rather than a recommendation.

When to get advice

KiwiSaver is simple enough that most people can sort the basics themselves, but your provider can usually help you choose a fund, and a financial adviser is worth it for bigger decisions, such as how to invest in the years right before you retire or draw the money down. The numbers in this article are illustrative, so plug your own figures into the calculator and then check anything important with your provider or an adviser.