Saving and investing are like most things in life. The more you put in, the more you can get out.

Think of your KiwiSaver goal as a water tank. The more you put in yourself, the less you rely on other sources, like rain, or irregular returns. That’s good, because you can expect rain over longer periods. But you can’t know exactly when – and you can’t guarantee it’ll rain when you need it. It’s the same with investing. If you want regular, high returns to get to your KiwiSaver goal, you usually have to take more risk.

That means investing in assets like shares, which can deliver you high returns – but you could get big drops, too. If you put in more money, you’ll be relying less on returns. This means you can choose funds within KiwiSaver that have investments with less risk. You may also pay less in fees for this.

That’s like reducing water leaking from your tank. It’s easy to increase your contribution by asking your employer. Recent changes mean you can make higher regular contributions – up to 10 per cent of your salary or wages. So, let’s look at the difference contributing more could make to your KiwiSaver goals.

Meet Tara and her KiwiSaver goals

Tara’s 30, and earns NZ$70,000 a year. She wants to buy a home in 10 years. Then she wants to retire when she gets to 65. We’ve looked at Tara’s future if she puts 3 per cent contributions into her KiwiSaver account, versus if she puts in 10 per cent contributions. For our calculations, Tara pays the highest tax on her investments, at 28 per cent Prescribed Investor Rate (PIR) tax. We used the Sorted KiwiSaver Savings Calculator to work out what Tara’s two lives might look like. You can use it yourself at www.sorted.org.nz

Tara’s first home

We’ve chosen a balanced fund for Tara because, with a 10-year horizon, she’s probably best to take slightly less risk. If Tara makes the minimum 3 per cent contribution every fortnight, the calculator says she could save NZ$45,243 in 10 years. But if she contributes 10 per cent, she could save a whopping $100,460. This makes a big difference to Tara’s choices. She could maybe have a bigger house, the same house with a smaller mortgage, or she might be able to buy in a better area. Most of the difference is because she’s putting in more money. Contributing more means the dollar value of your investment returns is higher, but that’s dwarfed by her 10 per cent contribution being more than triple the size of a 3 per cent contribution.

Tara’s retirement

When it comes to Tara saving for retirement, we can really see the impact of her increasing her contributions. If Tara joins KiwiSaver at age 30 she will have a zero balance. She’s got a while until retirement, so we’ll start her in a growth fund. After 25 years she’ll move her money into a balanced fund for the last 10 years. With a 3 per cent contribution, Tara could have NZ$382,072 by the time she’s 65.

But with a 10 per cent contribution, it could be NZ$857,755. The 3 per cent contribution will give Tara NZ$184 a week to live on in retirement, on top of New Zealand Superannuation, until her life expectancy of 94, the average for a Kiwi woman. The 10 per cent contribution gives Tara more than double the 3 per cent amount: NZ$414 a week on top of NZ Super. That gives her a lot more choices once she stops working.

When you have more money in your KiwiSaver account, compounding returns can help fast-track your savings. You usually make returns on your KiwiSaver balance over the long term. These returns then gets added to your initial balance, which increases your balance, and then you have more money to make returns on. Compounding returns can really help supercharge your KiwiSaver balance.

Hold that thought

Sometimes increasing your contributions isn’t the right thing to do. Contributing 10 per cent of your income to KiwiSaver can have big results in the future, but it has equally significant results in the present. With more money taken out of your salary, you’ll have less money to live on. Can you afford to put 10 per cent in? Do the maths and work out a budget to see if it suits your situation.

Your money’s locked into KiwiSaver, so you can’t withdraw it, unless it’s for your first home or retirement, although significant hardship claims are sometimes accepted. Life can throw a lot of unexpected things at us, not all of them good. Things like redundancy, sickness, the death of a partner or a relationship split can have a big impact on your finances. And you might have debt like credit cards, a student loan, or mortgages. Before you increase your KiwiSaver contribution as high as 10 per cent, tackle high-interest debt first like credit cards. Have a lump sum set aside for the unexpected, often called emergency savings.

The risks

Your money in KiwiSaver is invested in the financial markets. This means the balance can go up and down, depending on how the markets behave. There’s a risk that your balance might go down in value at the wrong time, when you don’t have time to recover from the losses. You can’t predict when markets will go down, but you can try to insulate yourself from the worst impact of nasty surprises. Do this by choosing the right fund. The more time between now and your goal, the more time you have to recover from losses, and the more risk you can take. For longer time periods, a growth fund can be a good choice.

But if you need your money sooner, you might want to take less risk. The more moderate your goal, the more likely you are to achieve it over shorter time periods, too. A balanced or conservative fund might be better for you. As Tara did, you can start with a higher-risk fund and then change to a lower-risk one as you get closer to your goal. If you’re unsure of what fund you should be in, or what your risk tolerance is, speak to your KiwiSaver provider or a financial adviser.

Published 28 November 2019

Paul Gregory is the Group Head of Investments at Pie Funds Management Limited. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read the Product Disclosure Statement at junokiwisaver.co.nz. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. It does not constitute financial advice. We recommend you speak with a financial adviser.