KiwiSaver is hard, there is a lot to think about in sorting out your KiwiSaver account. What is really unfair is that no one has ever told you to watch out for these things and they can cost you a huge amount for your retirement or your first home.
There are a fair few common mistakes, and we think it is really important for you to think about them. As you can see from the chart below, a few simple mistakes can cost you a huge amount!
Are you contributing enough?
KiwiSaver savings are an essential part of retirement planning and for two out of five Kiwis it is the only savings that they currently have. 70% of people with KiwiSaver accounts say they expect the scheme to play a very important part of their retirement — it’s fair to say the real number is going to be a lot higher than that.
If you want to be comfortable in retirement, you need to aim for an income of 70-100% of your current income every week, a goal that a 3% contribution rate is extremely unlikely to get you too. We estimate, conservatively, that people should aim for at least 6% to achieve a desirable retirement.
The cost of failing to understand and do something about your contribution rate could be fatal to your life quality as you get old. Should you stay contributing at the default rate of 3% (as most Kiwis do) you will get to your retirement and find that you have a massive hole in your retirement account — around $370k short on average.
The scariest thing about this one is that most people never think about their contribution rate – the default rate has been set by the Government, which also understands that most Kiwis are in the process of shortchanging themselves. Imagine finding out when you are 65 that all it took was an extra $45/week into your KiwiSaver and you could have had an amazing retirement!
Are you in the wrong type of KiwiSaver fund?
Are you taking enough risk, or maybe not enough risk? Understanding your risk profile and investing appropriately for your risk will be the biggest determinant of returns for your KiwiSaver account. If you're invested for the longer term you need to be taking more risk (growth-orientated fund) if you're invested for the short term you need to be taking less risk (income orientated or conservative fund).
Don’t take enough risk and your money won’t be working hard enough for you and take too much risk and you risk losing a significant chunk of your KiwiSaver balance just when you need it. That was the case for many prospective first home buyers sitting in growth funds during the recent COVID-19 market downturn. With a first home purchase within a three-year horizon, people need to taper down the risk of their KiwiSaver fund.
A recent survey showed that more than half of New Zealanders sit in funds that do not suit their objectives. This is understandable as fund choice is often an afterthought and never really sits at the centre of your thought process when you choose your KiwiSaver scheme.
For someone that spends a lifetime failing to realise they were in the wrong fund, the lack of action could cost them more than $240k.
We suggest you use this tool to find out what fund suits you best.
Are your fees too high?
Not many people know it, but the KiwiSaver plan might end up being the second biggest expense in your life (after your mortgage interest payments). The average Kiwi will pay over $90k in KiwiSaver fees in their lifetime. But most people don’t see this as they never really see an invoice with the expenses coming out.
The average KiwiSaver growth fund charges 1.19% per annum, though fees can go as high as 1.97%. The higher your fees, the less KiwiSaver money is left for you.
The difference between paying the highest fees in the industry and the kōura fees could save you over $100k by the time you hit 65.
Are you sitting in a laggard fund?
Whilst past performance is not a sign of future performance, there are often signs that some fund managers just aren’t up to the job. Looking at the range of KiwiSaver funds, there are a few people that have consistently underperformed and remain in the “bottom half” of providers.
A useful resource is the Morningstar KiwiSaver performance table. Here you can compare funds with their 1 year, 5-year and 10-year performance. If you are unlucky enough to be in a fund that has been in the bottom half of their category across all of the different time horizons, then it is probably time to find a new fund manager.
The worst performing growth fund delivered a return 1.8% per annum lower than the average. That fund has been one of the worst performers on every time horizon. If 1.8% underperformance remains through the lifetime, the average KiwiSaver would have lost a shocking $159k.
Are you paying too much in tax?
Like most things in life, KiwiSaver account incurs tax. To make sure you don’t pay too much, or get an unexpected tax bill you need to make sure you have the right tax rate (PIR rate). If your rate is not high enough, the IRD will send you a bill at the end of the tax year asking you to top up your tax paid. If your tax rate is too high, well – you can’t have that refunded so you lose out. In 2018, there were over 950,000 New Zealanders that paid too much tax (by an average of $44). Libertarian or not, no one wants to make an unnecessary donation to the IRD.
To find out more about PIR rates and whether you have the right or wrong PIR rate, have a look at the IRD website here.
Choose the right fund. Choose kōura.