Albert Einstein famously referred to compounding interest as “the eighth wonder of the world.”  

He’s right. It’s truly wonderful if you are the one earning the interest = Your money makes more money, all by itself!

Your KiwiSaver investment earns compounding interest too. And it can earn you a lot more for your retirement or first home if your KiwiSaver settings are optimised.

We talk about this a lot, but it is SO important. It’s worth hammering home.  

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The default KiwiSaver settings are unlikely to get you to where you need to be.

‍I've made this bold because you need to read it and let it sink it.

But never fear, Keep Calm and KiwiSaver on...... there is hope.

The wonder of compounding interest  

To give you an example of how compounding interest works, let’s say you deposit $1,000 into an account with a 5% interest rate that compounds annually. At the end of the first year, you’ll earn $50 interest, but instead of paying you that $50 and leaving your balance at $1000, the $50 gets added to your account and the new interest rate gets based on the new balance of $1050.  

In the second year, you’ll earn interest on $1050, and so forth.

I use small numbers in this example but imagine the compounding interest on the tens of thousands of dollars that you have in your KiwiSaver. And with the Government (member tax credits) contributions, that’s $521 every year (not $50) going into your KiwiSaver – if you’ve made the minimum required contributions. Imagine the compounding interest on that contribution alone!

"Money makes money. And the money that money makes, makes money. Beautiful. "

Default KiwiSaver settings are not your friend.

The above just goes to show that there is good reason to ensure your KiwiSaver settings are such that, depending on when you’ll need to withdraw those funds, you are in the best position to maximise on those compounding interest factors.  

For example, if you are in KiwiSaver but have not done anything with it, you’re likely set up with default settings. This will be a very low risk (and so, low reward) fund on a minimum 3% contribution rate and things may just be ticking along. You may, or may not, hit your retirement savings goals. For most of us on the average wage in NZ, the default settings are unlikely to get us to a retirement with a whole lot of choices.

Let's talk numbers for a sec.

If we take a 40-year-old woman for example, on an average NZ wage of $70k, with an average KiwiSaver amount $36k, these are the difference her settings can make:

Scenario A: No Frills retirement

40-year-old woman on $70k, with $36k in KiwiSaver, in a conservative fund and contributing at 3% can expect to have $162k by age 65.

Scenario B: Choices retirement

Conversely, that same woman changes her settings to an aggressive fund and contributes 6% can expect $345k by the time she turns 65.

Source: Sorted KiwiSaver Calculator

Regarding our first "default scenario" is 162k going to be enough? Yes, she will get the NZ Super once she is 65. This will be around $24k after tax or she is single. But she will still need an estimated average amount of $40k per annum to retire on, leaving her an estimated shortfall of $16k per year.

And get this - The average Kiwi expects to need $457,000 in savings and KiwiSaver to fund their retirement. That figure jumps to $600,000 for those in their 60s. Yet only 41% feel confident they are on track to raise the funds they need, and nearly half of those surveyed (47%) say their KiwiSaver will be their main source of income after 65. Yikes.

Source: Canstar

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You can see that the difference intentional settings can make to the future you!

I used the default settings, back in 2007, when KiwiSaver was launched. I got into KiwiSaver and didn’t realise there were some settings I could manipulate to get a greater return. That made a difference in 2012 when we purchased a house, used the KiwiSaver and I could see that my deposit could have substantially larger if I had been in a Growth or Aggressive fund. Damn.

Thankfully, the default setting now is a Balanced Fund, which does generate some better returns in most cases (with a little more risk) and you’re likely not going to be worse off when the time comes to withdraw.  

Intentional investments are always best.

Default settings are considered a safe choice for those who don’t have a lot of investment knowledge or have time to actively manage their investments.  

Intentional settings on the other hand, are those deliberate choices made by you when selecting your KiwiSaver strategy. Whether that is for a first home withdrawal or retirement, there are things you can actively do to potentially make a significant difference in the growth of your savings in the long-term.  

The exact amount will depend on several things, including your investment goals, time horizon (when you need to use the funds) risk tolerance and the investment options you choose. You also have more say these days over how your funds are invested – with socially responsible, ethical investing funds available.  

KiwiSaver is a vehicle that allows you to be in some control about how and where your investments are made. You may have other strange and fantastic investment portals, like crypto, collectibles or fantasy sports and KiwiSaver just makes up a small part of your portfolio – but it’s a vital one over the long-term to ensure that your settings are aligned with your goals.  

"Choosing your settings today can mean the difference between a “no frills” retirement and a retirement with much more freedom and choices. Remember, you may also have 30+ years in your retirement, so don’t leave your retirement investment to chance. "

Markets bounce, so prepare to ride them out.

Over time and the life of your KiwiSaver investment, there will be ups and downs in the market. Like any investment, there is a level of risk, and having an awareness of this can make your investment journey a little less bumpy. For example, all our KiwiSavers got hit hard in 2020 with Covid, and again in 2022 with the war and conflicts overseas. At these times, there was a noticeable downward shift in the market.  

A long-term investment strategy allows you to ride out the ups and downs of the market. Short-term market fluctuations can be unpredictable and cause investors to panic and change funds or withdraw.  

"If you had your funds in Growth investments and when the market dropped, you moved them all out and put them in a Conservative fund, you’re essentially locking in the losses. Damn!! "

One could argue that at the time of the drop, making voluntary contributions or upping your contribution percentage would be beneficial as, when the funds bounce back, they’ll be worth more.  

Keep Calm and KiwiSaver On.

There are online KiwiSaver calculators (see links below), that allow you to punch in some numbers and different contribution percentages to see (with compounding interest) what your balance could look like in the long-term. I suggest you have a play around and see what actual figures you need to hit and when, to reach your preferred retirement.  

You may find that you need to increase your contribution, pay down a lump sum or change your fund type to hit your long-term goal. The good news is that any positive actions you take today will have a positive effect on tomorrow. Even better is that as part of our financial advisory services at Velocity Financial, we can offer your KiwiSaver advice for free. Why wouldn’t you??

It's not too late. With a long-term investment strategy, you can remain patient and stay invested though market downturn, knowing that historically, markets tend to recover over time.

So, Keep Calm and check your KiwiSaver Settings.  

Spend 5 minutes on your future.

If you need a reality check, grab a coffee and check out these calculators. Don’t forget to sit down!!

Work out how much you will have in your retirement:

https://sorted.org.nz/tools/retirement-calculator

Work out how much your KiwiSaver will be worth:

https://sorted.org.nz/tools/kiwisaver-calculator

Spend 60 minutes on your future.

Even better, book me in for a free KiwiSaver consultation and kiss those lousy default settings and shady investment funds goodbye.  

I’d love to hear from you. Email me here: simon@velocityfinancial.co.nz

Or make a time with me here

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Simon.

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About Simon

Hi, I’m Simon a Financial Advisor here at Velocity Financial. I enjoy working with my clients to help demystify all the Mortgage, Insurance and KiwiSaver fine print, and help get them to where they want to be. I am dedicated, thorough and offer professional advice that works for you. I like to help people on their journey and be a trusted person to guide them through really important events in their lives such as the home buying process. I help my clients collaborate with valuers, builders, lawyers and real estate agents to ensure a seamless experience. That satisfaction of reaching the goal with the least amount of stress for my clients is hugely rewarding. I navigate unique scenarios and tailor lending solutions for individual circumstances to save money and time. As a proud father of two and avid supporter of all my children’s endeavours, I know just how precious that time is. On the weekends you’ll also find me mountain biking, surfing, or checking out NZ’s great walks.

Disclaimer: Simon O’Neill (FSP534466) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Simon’s disclosure statement on our website.

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