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How can your 5-year-old earn $84,000 at retirement? Retirement may seem far off when your child is five, and you might think it's too early to start planning for their future. However, by starting early, you can assist them in building a retirement nest egg.
By saving as little as $5 per week from age 5 to age 65, you could potentially increase their retirement savings by up to $84,000, depending on the type of investment fund you choose.
Additionally, you have the flexibility to make additional contributions to their KiwiSaver account whenever you wish. This provides a wonderful opportunity to invest any money they receive from family and friends on occasions such as Christmas or birthdays.
Consider that your children may have a retirement period of 25 years or more if they retire at 65, especially considering that people are living longer nowadays. The need for retirement savings and discussions about what retirement looks like have become increasingly important.
By preparing them for choices in retirement, you can help them envision their ideal retirement lifestyle, whether it involves travel, moving to a dream destination, owning a beautiful home or car, supporting their family, or simply living a comfortable life without financial worries.
Forming savings habits early on allows you to teach your children about the importance of saving, investing, and preparing for the future from a young age. You can encourage and assist them in developing good long-term savings habits. Talking to them about savings and regularly showing them their savings balance can motivate them to save more. My 16-year-old daughter, who works part-time, is always thrilled to see her savings grow. She sets targets for her savings and eagerly works towards them, while also enjoying shopping and spending time with friends.
Even if they start earning income from a small part-time job, they will contribute 3% of their income to KiwiSaver, which amounts to only $3 for every $100 earned.
A 3% contribution has a minimal impact on their current income but could have a significant impact on their retirement savings.
Starting investments at an early age allows for investing in more aggressive funds, which can potentially yield higher returns over the long term. You also have the flexibility to adjust your investment strategy as your needs change.
Taking advantage of compound interest is another benefit. By earning interest on the initial investment and the accumulated interest over time, your savings grow without requiring any additional effort.
The longer you save, the more your savings will accumulate.
Additionally, by contributing the minimum required amount for three years, they could be eligible for assistance in purchasing their first home. Starting early gives them more time to save towards their home purchase, and considering the ever-increasing real estate prices, having substantial savings is advantageous. Depending on your circumstances, there may be additional benefits, such as a First Home Grant, which can be put towards the purchase.
Once they turn eighteen, eligible members can receive annual tax member credits from the government. Currently, if they contribute $1,042 per year or $21 per week between July 1st and June 30th, they qualify for an annual government contribution of $521.43 or a proportionate amount if they turn eighteen during the year.
It's important to note that there is no fee to join KiwiSaver, but there may be annual management fees depending on the fund or provider, and some may require a minimum balance before imposing fees.
It's recommended to do it now and consider it a "set and forget" task. This is one of many items on the to-do list that, if left undone, may be forgotten until your child turns 18 and is heading off to university or starting their first job, when they might already be thinking about buying their first home.
To enrol your child, a parent or guardian needs to co-sign the application until age 18. For 16- and 17-year-olds, one parent or guardian is required, and up to age 16, both parents and all guardians must complete the application. The necessary documents include the application form, birth certificate, proof of guardianship, IRD number, and verified copies of ID for parents/guardians, as well as proof of address.
Important things to remember: Once your child is enrolled, they cannot opt out without taking a savings suspension. They will not receive any employer or government contributions until they turn eighteen. The funds are locked in until the first home is purchased or until retirement.
How can we assist you? Feel free to discuss enrolling your children in a fund with us. We can help you set it up, allowing you to check off that task from your list.
Tania.
Disclaimer: Tania Crocker (FSP769894) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Tania’s disclosure statement on our website.