Fixing your KiwiSaver contribution - things to consider

19 November 2020

It's hard deciding how much you should contribute to your KiwiSaver account - here are some things to consider.


Think back to the day when you completed your KiwiSaver form and fixed your KiwiSaver contribution rate. How do you decide what that figure should be? It's certainly a really hard one to answer. The more you contribute, the more money you will have for your retirement or your first home. However, you need to find the right balance between sacrifice today or a sacrifice in the future.

To guide you with your decisions, here are three things you can consider when choosing the contribution rate that's right for you!


Maximise the "Free Money"

If there's one thing we learnt growing up with grandparents is that if someone gives you a gift (or free money), you don't refuse. With KiwiSaver, there are two types of "free money" involved - government and employer contributions. 

  • Most employers will match contributions to a minimum of 3% for your KiwiSaver account - if you contribute 3%, your employer will also match this. You need to be slightly careful though - some naughty employers will have you on a Total Remuneration Package which means that they will deduct their 3% contribution from your salary, so you are not the same. You should ask your employer whether KiwiSaver is on top of your salary or included in your salary.
  • The Government also matches contributions 50c in every dollar up to a maximum of $521 per year for New Zealand residents over 18. So if you contribute up to $1,041 in a year, you will get an additional $521 free money.

You should always be looking to maximise the “Free Money” if you can afford to as this is a very good investment return for you. An average Kiwi on $80,000 will contribute $2,400 a year to their KiwiSaver (3%) of salary, this will be matched by an additional $2,400 in Government and Employer contributions, essentially doubling what you're able to save for your retirement/first home. 


Figure out how much you really need

How much you need for your comfortable retirement depends on what you want to do in your retirement.  Ideally, you should be aiming for 70% of your current income to have a comfortable retirement.  That is a pretty generic number though, our suggestion is that you create a detailed budget of what you think you need to live comfortably in your retirement.

Are you prepared to lower your standard of living when you retire or would you be open to selling your home and downsizing thereby using the equity in your home to fund your retirement? These are just some of the questions you need to ask yourself.


What you can afford to contribute

You may be thinking, "it's all well for kōura to be suggesting I max out my KiwiSaver contribution but I can't afford to do that!"  We agree that what you can afford to contribute is really up to how much you earn and what your expenses are. However, there are a lot of small expenses you can focus on to find savings in unexpected places. When it comes to saving for the long term it pays to remember that even a little bit can make a big difference (and no, you don't need to give up on your flat white).  Some interesting things that we found when we were doing our research

  • Did you know that simply moving your electricity, insurance or broadband to the lowest cost provider can save you $10 per week (for each provider!). If you were to invest this directly into your KiwiSaver fund it would give you an additional $30 per week through your retirement. If you did all three of these things that would give you an extra $90 per week in your retirement. That is an extra meal out each and every week for your retirement. And without any sacrifice on your part at all.
  • It's also worth considering if you really need a second car in your household. The average cost for owning and running a small car is over $6,500 per year in New Zealand. If you can find a way to manage with one less car and invest this into your KiwiSaver balance, you will have an additional income of $18,000 per year through your retirement. A very large and material amount.
  • A pay rise is also the perfect time to trick your mind into saving more. By timing the increased contribution % to your pay rise, you won't notice the extra money leaving your account and hence you won't really miss it. The same goes for using annual bonuses and monetary gifts from family. Using these to make voluntary contributions into your KiwiSaver fund is a great idea as you weren't expecting to use this money towards your day-to-day expenses and hence a portion of it can be used as 'gift to your future self'.


What does this mean for you?

Albert Einstein called compounding interest the 8th wonder of the world.  Warren Buffet to believes that compounding interest is the greatest contributor to his wealth. Compounding interest in its simplest form means that you can earn interest/investment gains on the gains that you have already made. 

The more you save, the more money you make on your savings, making the savings even bigger. It is a great circle you want to be a part of. If 30 years ago you had invested $10,000 in the stock market, you would have earned an average 8% return per annum since then. Today you would have over $217,000. 

The exact same principle applies to your KiwiSaver account.  The more you invest early, the more you will have at retirement. 



Meet Rachel

Rachel is 30, has just bought her new home and is earning $80,000. She is currently contributing the default rate of 3% to her KiwiSaver account but is wondering if she can afford to contribute some more and if her sacrifice now would be worth it in the future. 

As you can see in the table below, with a contribution rate of 3%, Rachel can afford to spend $635 per week in retirement. She is shocked to learn that this would only be 53% of her current take-home income of $1,159!  

The impact of changing contribution rates

Contribution Rate Weekly employee contribution
Expected KiwiSaver Balance Weekly Income in Retirement including NZ Super
3% $46 $592,000 $635 (55% of current income)
10% $154 $1,358,000 $1,035 (98% of current income)


However, if she lifts her contribution to 10% and contributes an extra $108 towards her KiwiSaver balance each week, now this means her retirement income would be close to 98% of what she earns currently and she'd get $400 more to spend per week in retirement.  In our view that's a pretty good trade-off - you sacrifice $108 per week now to gain an extra $400 per week through your retirement.



Want to know your KiwiSaver outcome?

Check it out now with our personalised Kiwi Saver Advisor!

Once we understand a little bit about you and your risk tolerance your personalised KiwiSaver advisor will let you know how much you will be getting for your retirement and how that compares with what you currently take home!

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