Navigating KiwiSaver Episode 1: KiwiSaver 101

Want to learn more about KiwiSaver? This is episode 1 of our new navigating KiwiSaver series.

This first episode is a KiwiSaver 101, you will learn what KiwiSaver is and how it works. 

Jess asks Chief Economist Stuart Johnson how much she should be contributing and when to review her contributions.

This podcast has been prepared by the FMA. The advice is of a general nature, and is not intended to be financial advice and FMA does not accept responsibility for any loss that any a person may suffer from following it. The FMA recommends that our audience seek their own financial advice in respect of investing in KiwiSaver.

Transcript

Jess

Kia ora and welcome. My name is Jess. I'm part of the external communications team here at the FMA. Today I'm joined with our Chief economist, Stuart Johnson, and we're going to do a little KiwiSaver 101 for you today. So Stuart, to kick us off. High level what is KiwiSaver?

Stuart 

Thanks for having me Jess. So KiwiSaver is the system that New Zealanders save into while they're working to put money aside for their retirement. So it's a retirement savings system.

Stuart

So at its most basic level, you're putting some money into KiwiSaver. You're employers putting some money into KiwiSaver. Conveniently, the governments putting some money into KiwiSaver for you and that will grow and grow over the course of your career. And then when you retire, you'll be able to access that money. And that will give you some income in your retirement. Jess, it's really important to point out that it's not all the income you'll have in retirement, because you will also have access to NZ Super and that's paid to everybody when they get to 65. So there's a little bit of savings.
 
 Jess
 So, are they different things?

Stuart

Both are very different things. You might think of NZ Super as the government saving for your retirement. Remember, it's a bit of an old fashioned phase, but the old age pension, that sort of NZ Super. KiwiSaver is where you are saving privately. You're saving, your own money. And then you'll be able to use that in retirement as well.

Jess

So, Stuart, what are the different contributions? Where is all the money coming from that's going into my KiwiSaver?

Stuart

Yes, it's a great question. It's not surprising you're keen to know where the money's coming from. So probably you're saving maybe 3% into your KiwiSaver? Yeah and that that's basically just calculated as 3% of your income. And at the same time that your employer pays you, they put that money into KiwiSaver or into your KiwiSaver account. At the same time, your employer is required to put some money into your KiwiSaver account. Now this gets a little bit tricky, but most of the time the employee contribution is 3% and we can talk a little bit about contribution rates and normally, but not always, the employer contribution is 3%, so it's a bit confusing because it's the same number. But. Two different sources of money flowing into your KiwiSaver. 
 
 So Jess, there's one more piece. The government also contributes a little bit of money to your KiwiSaver and this is quite important as long as you've contributed !$1043 dollars, the government will put in 521 dollars. And one of the things we always say to people is to have a look and make sure that you've hit that $1043 dollars because that's maximising the government's contribution.

Jess

So I think I'm contributing 3% at the moment. Do you think that's the right amount for where I'm at? In terms of my career, age.

Stuart

So that's a really tough question, Jess. And when we think about what the right level or the optimum level of contribution is, that's different for different people. Let's use you as an example and try and figure out what we think might be acceptable. So roughly, Jess, how old are?

Jess

27.

Stuart

27 Well, I'll tell you what, just to make the maths easier, let's make you 25.

Jess

Ok, Nice.

Stuart

It's always nice to be younger, so that means that you've got a full 40 years until you retire must seem. Like a long time.

Jess

Yeah, gosh phew. 

Stuart

So it's really difficult for me or anybody else to know how much money you're going to need in your KiwiSaver in 40 years.

Jess

Yeah. How do you work that out?

Stuart

It honestly, it's it's really challenging and it's based on so many assumptions that it it's it it's it's a bit finger in the air if I'm being really honest. If I was talking to somebody who was 55 who was ten years away from retirement, then they need to come up with a target amount and they really need to focus on their KiwiSaver. Given that we've discovered your 25. We should think maybe a little bit about how much you can afford to contribute and that would be a much better way of thinking about what was appropriate for you given the life stage that you're up to. So I'm imagining that you've got some goals that you want to accomplish. Maybe you wanna go on holiday or you wanna buy a house. Is is there anything that fits into that categor?

Jess

Yeah, I'd love to go on holiday next year. And then the house is kind of two to three years.

Stuart

Excellent, right. So I'm imagining then that you're probably saving for the holiday, right and saving for sort of discretionary spending. That's an important financial goal. And do you have a little bit of money put aside? You might have heard the term? A rainy day fund? 
 
 Jess
 Yup
 
 Stuart
 
 Excellent. So somebody in your situation, if they've got a rainy day fund for emergencies, they're saving for some discretionary purchases, a holiday, a house deposit. It's a bit of a, a bit of a special one. And we might come back to that. They should also be putting some money into their KiwiSaver. And so the individual amounts that you're putting into those different savings buckets, we might call them will really depend on your personal circumstances. But I would, I would really hope that people in their 20s and their 30s are trying to think about those different types of savings. The other thing that's really important is that there are very specific rules on how much money you can put into your KiwiSaver.

Jess

Because there's different rates, right? Yeah.

Stuart

Absolutely. There are different rates. So those rates are 3%, 4%, 6%, 8% or 10%. So for some reason you are not allowed to put 7% of your income into your KiwiSaver and that that's well, that's just a bit odd. Ideally, we'd like to see the amount that you're putting in increasing over your lifetime. So in your 20s in your mid 20s putting 3% in is probably OK. Maybe in your 30s, your early 30s, I think we'd like to see that increasing. You might start putting in 6% for people who are in their 50s, who are much closer to retirement. Hopefully they'll be putting in 8, maybe 10%.

Jess

So would you say at different life stages people should review their contributions?

Stuart

Reviewing contributions is really important. So yes, when somebody has a life event so they get married or they have children, maybe they buy a house. That's a really great time to be looking at your overall financial circumstances.

Jess

Thank you so much for your time today. Stuart, if any of our listeners want to find more information, you can head to our website www.fma.govt.nz. We will see you next time.