What is KiwiSaver?

KiwiSaver

Being set for your retirement is something that not many people think about until it is too late. There are far too many horror stories around New Zealand of retirees unable to afford to live, especially with inflation rising and the cost of living being more significant than ever before. There is an option to mitigate the risks of not being able to afford to live in retirement and a way to secure yourself financially and your family, and this option is KiwiSaver.

Thinking about retirement may not be on your radar at this moment, or it may simply be at the forefront of your financial planning. The question you may be asking yourself is should I start with KiwiSaver, or should I just leave it and save on my own? This is a question that is easy to answer as we can just look at the historical facts, which is that KiwiSaver is a proven savings scheme that has worked for many people and will be why so many people have and will continue to become financially secure throughout retirement. So, in short, the best time to start a KiwiSaver account is as soon as possible, and with help from National Capital by simply completing a HealthCheck on their website. The team at National Capital can then advise you to ensure you are with the right provider and in the right fund, depending on your situation, to ensure you have the best chance of becoming financially secure for retirement and/or the best chance of securing your first home.

What is KiwiSaver?

KiwiSaver is a voluntary savings scheme backed by the New Zealand government to prepare you for retirement from a financial perspective. KiwiSaver is a scheme that takes a small percentage of your income per pay period, this money is then sent to your KiwiSaver provider, which they invest in the fund chosen by yourself. The funds are invested by the provider to create a return on your investment, this return differs depending on the provider and the fund type you choose.

Different types of funds?

Providers offer many different types of funds; however, the most common ones are cash, conservative, moderate, balanced, growth and high growth/aggressive. Each fund carries a different level of risk and also a different level of volatility. A cash fund is the safest option as it is a very low volatility and risk fund which doesn’t create very high returns but also does not endure the volatility that the other funds do, meaning that it will not likely have many ups and downs during the period, but it won’t create high returns. We then move to a conservative fund, a low volatility fund that isn’t likely to create significant returns. This volatility increases with every fund type going up the scale, but with each fund type going up, both the growth and aggressive will indeed endure more volatility within the fund but usually will create a greater return in the long run, as seen in historical figures.

We could also look at what precisely the difference is between your standard cash, conservative and growth funds. A cash fund usually invests all of its holdings directly into cash, which is why little volatility is seen in the fund however because cash is a safe investment, it realises very little returns. Moving to a conservative fund, this is where cash is still a large holding in most funds of this type and invests a small amount into fixed interest assets and, on occasion, a minor amount in equities (shares). The further up the scale on fund type from cash to growth, the most significant difference is that the higher up the scale, the more significant amount the fund holds in equities (shares) and therefore becomes more volatile but also has the potential to create far greater returns.

Risk vs Volatility:

When looking at KiwiSaver options, you may encounter both risk and volatility in all of the information you will read about providers and their fund options. Now, these two words are something that gets mixed up and is often used and explained in the wrong way. Now the word risk tends to turn many people away from investing and also deters a large number of people away from funds that don’t actually contain considerable risk but instead contain a high amount of volatility, and this is where the phrases get crossed over and misused. 

Risk, in a nutshell, is the chance that you will lose money and not be able to regain said funds. Whereas, volatility is simply the chance of your investment increasing and decreasing during the period it is held in the KiwiSaver Fund. So don’t let the word risk deter you from investing in funds that may give you greater returns because where risk is used, just replace it with volatility, and it will give a better understanding of what is trying to be said. From a fund-type perspective, it’s not that a growth fund has more risk involved if you invest for the recommended timeframe. It’s just that the fund is likely to be more volatile (ups and downs) during the period you have your money invested.

KiwiSaver providers:

There are many KiwiSaver providers in New Zealand, and there are many fund options; some perform better than others, and some invest in more socially responsible assets. This can be a tricky aspect to navigate, but it can be easily broken down. Depending on your personal preferences, some funds do very well from a returns perspective, and others invest in socially responsible assets; there is also the aspect of fees that should be taken into consideration as some providers charge more fees than others. This can all be sorted out depending on what you want from your provider (high returns, low fees, etc.) through the National Capital KiwiSaver HealthCheck.

Retirement vs First Home:

Besides, helping you become financially secure for retirement, there is also one other way that you can access the funds that are held in your KiwiSaver account, and this is to buy your first home. If you are looking at buying your first home, then please remember that you can use the funds from your KiwiSaver account to help towards the deposit of the home. Now be aware that the fund type you hold your KiwiSaver investment in will usually be different between trying to obtain a first home and retirement as most funds have a recommended investment horizon, and if you are close to the amount already, then you do not want to have minimal volatility in your account as the potential market dips in say a growth fund might not suite your needs if you need the money in a small amount of time.

Benefits of KiwiSaver:

KiwiSaver has many benefits to the scheme, and there are many aspects of KiwiSaver that can make life far less stressful, especially nearing retirement. Starting the scheme earlier rather than later will be highly beneficial to ensure that you will have the best opportunity to become financially secure later in life. By being a voluntary savings scheme, KiwiSaver is a great way to ensure that you are in fact putting money away for your future and takes the option out of your hands as it is automatically deducted from your earnings whenever you get paid.