KiwiSaver – on the surface, it’s pretty straightforward. If you’re employed and enrolled in the scheme, your contributions are automatically deducted from your wages, your employer also pays in, and the KiwiSaver provider invests your money in various assets. So, you can just sit back and relax until you turn 65, right?
Well, not quite. It’s a common misconception that KiwiSaver is a ‘set and forget’ tool. While it is a long-term investment tool, if you’d like to make the most of it, it’s important ensure that your KiwiSaver is set-up right for you: your current budget, your goals for the future, and your risk profile.
So, here’s how small but well-thought-out tweaks can make all the difference to your future financial well-being.
Your time horizon
Let’s start with why you’re invested in KiwiSaver. What’s your primary goal at the moment? First-home first, or straight to retirement? The answer to this question determines your time horizon.
Your investment time horizon is the length of time your KiwiSaver savings will be invested until you need to access the money, either for your first-home purchase or your retirement (whichever comes first). And depending on how long your time horizon is, you may need to reassess your contribution rate or the risk level of your fund. Which leads us to the next point…
Your risk profile
Unlike many people think, KiwiSaver is not just a savings account; it’s an investment scheme. And just like any other investment, it involves a certain level of risk, depending on the fund you choose.
Risk and returns are correlated: the higher the level of (likely) risk in your KiwiSaver, the higher the potential reward in the long term. But you also need to be comfortable with wider fluctuations in value, in the meantime.
From defensive funds through to conservative, balanced, growth and aggressive funds, it’s important to make an active choice of KiwiSaver fund based on your personal risk profile.
So, what’s a risk profile, and how can you work out yours?
In short, your risk profile is determined by the combination of:
- Your attitude to risk, which is the ‘emotional’ component of your risk profile – how you feel when you see your balance go up and down by significant amounts;
- Your capacity for loss – how much you can afford to lose in the short term, depending on your investment time horizon.
For example, if you’re using KiwiSaver for retirement and that’s more than 10 years away, you may be able to choose a higher-risk fund (compatible with your personal attitude to risk, of course). For you, KiwiSaver is a long-term investment. Once you’re confident that you’re in the right fund for you, you can focus on the long run, ignore short-term movements in value as much as possible, and just check in once a year to ensure you’re on track.
Are you planning to use your KiwiSaver in the next year or two to boost your first-home deposit? Then investing in a lower-risk fund until then makes sense. It’s about protecting your hard-earned money from short-term market volatility as much as possible. Once you’ve bought your house, retirement becomes your primary goal again and you can switch back to a higher-risk fund anytime, again of course, depending on your risk profile.
Many people don’t realise how crucial choosing their KiwiSaver fund is, but it’s one of the most important steps you can take to make the most of your KiwiSaver. Not enough risk, and you may be missing out on potential returns; too much risk, and you might be in for an ‘uncomfortable’ ride.
Not quite sure what your risk profile is? Get in touch: we’re here to help you work that out.
Choosing a fund that’s aligned with you is a key step, and so is selecting an appropriate contribution rate for your goals.
Think of your KiwiSaver fund as a nice car: depending on your driving style, you may want it to be either fast and powerful, or not as fast but ‘safer’. Now you just need to put some petrol in.
In this metaphor, your contribution rate is the fuel, and the more you put in, the further you can go.
The question is, are you contributing enough to achieve your goals? Running some projections can show you just how far your current contribution rate is likely to get you.
People often don’t realise that a 3 or 4 per cent contribution rate is unlikely to be enough to secure a comfortable retirement lifestyle, especially if KiwiSaver is the primary source of retirement income. But even if you own a home or have other investments, increasing your contribution may still make good financial sense.
Once again, one size doesn’t fit all. We can help identify your sweet spot based on current budget needs, your desired retirement income, and other key factors. Remember – you can change your contribution rate anytime (it can’t go below the minimum of 3% of your gross income), and as your projections will show, it’s something worth considering.
Like to learn more?
It’s never too late, and for sure never too early, to take the reins for your financial future. If you’d like to talk about your KiwiSaver needs, get in touch. From running your numbers through to talking through risks and returns, we’re here to help.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.