Navigating KiwiSaver Episode 3: KiwiSaver Contributions

Did you know there are five contribution rates when it comes to your KiwiSaver — 3%, 4%, 6%, 8% or 10?  

Along with your personal contributions, your employer contributes to your KiwiSaver as well as the Government.

Episode 3 of our Navigating KiwiSaver series is out now! This week Stuart explains to Jess the importance of contribution rates and why a yearly review could be beneficial.

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. Anyone considering investing in KiwiSaver or making changes to their investment in KiwiSaver should seek advice from a financial adviser.

Transcript

Jess

Kia Ora my name is Jess. I'm in the external communications team here at the FMA today. I am joined with Stuart Johnson, our Chief Economist. So today, we're gonna talk a little bit about contributions. So I'm gonna throw to you. My first question is, how much should you contribute to your KiwiSaver?

Stuart

Alright, so contributions. Contributions are a little bit tricky, but there are some good rules of thumb that can really help people think about the appropriate contribution rate. So when we're thinking about how much you should contribute to your KiwiSaver, there's two ways of thinking this through. The first one is to ask yourself how much money do you think you'll need in retirement?

Jess

How do you answer that question?

Stuart

It's a tough question, Jess. If I remember rightly, you were about 27. So you're a long way. 
 
 Jess
 25 
 
 Stuart 
 This growing younger works for me. You can be 25. Alright.

So keeping the math simple, you're a long way from retirement. A good 40 years. So it's really hard to know how much money you're going to need when you actually retire in 40 years time. Your lifes gonna have all different sorts of things. Investment returns are going to have all sorts of different things, so it's really hard to tell. In your 20s and your 30s, and perhaps even in the first half of your 40s. An easier way to think about this is to think about how much you can afford to contribute to your KiwiSaver. So thinking a little bit more about your present financial circumstances and how much you think you can put away for your retirement, rather than focusing on the much more difficult question of how much you will need in 40 or 50 or 60 years time. Does that make sense?

Jess

It does, but I'm still curious to know how much you think I should be contributing right now because I'm not gonna lie, I haven't looked at it recently yet or changed my contributions. Full disclaimer.

Stuart

That's OK. Answering the question of how much I can afford to contribute is easier, but certainly not easy. So when we're talking to people about their whole financial circumstances, we'd encourage people to think about having some money set aside for a rainy day. I'm sure you've heard the term a rainy day fund. You know, in case something happens, your car breaks down or you need a new car or you lose your job or something of that nature. The other thing to consider is that you can only contribute certain amounts to KiwiSaver, and that's going to feature in this conversation as well.

Jess

Yeah. So what are those certain amounts?

Stuart

For sure, that's a really good question. So you can contribute as the employee either 3, 4, 6, 8 or 10% of your income. Do you know how much you're contributing now?

Jess

No. Maybe in the default. Is there a default?

Stuart

There is a default when people go into KiwiSaver most of the time they start contributing 3%, which is the minimum. So if you haven't done anything, probably 3% is where you are and honestly that's a good place to start. But over the course of your life we'd hope to see that increasing.

So when you've got a little bit more money, hopefully a bit more disposable income, you've been paid a little bit more. You're probably saving more into your discretionary savings account, but at the same time increasing the amount that you're putting into your KiwiSaver is also really good.

Jess

Umm. So if I'm let's say putting in that 3% right now and I haven't honestly thought about changing it when in my life, should I think about changing it? So like let's say you know you have kids, you buy a house things like that. Is it certain life stages that you'd recommend people should maybe look at it or?

Stuart

That's actually a really great answer. That's certainly half of it. We call them life events. Yes. So every time you have a life event looking at your whole finances, including how much you're putting into your KiwiSaver. Will be really. Good. I would also sort of encourage people to do it once a year.

Jess

OK.

Stuart

Having a look at your KiwiSaver looking at your annual statement looking at how much money is in your other savings accounts, thinking about any debt, maybe debt, we should be looking at bit more regularly than once a year, but certainly checking in properly with your finances every year is a really good idea.

Jess

I need to do that.

Stuart

We all do.

Jess

I will go and do that after this.
 
 So another question on that, that I was just thinking right now is when you get a new job, is that also a good time to think about it? Like if you get a pay increase or decrease like stuff happens, is that a good situation to kind of relook at your KiwiSaver contributions?

Stuart

Absolutely. We would think of all of that as a life event, an increase in your salary, definitely a decrease in your salary. Unfortunately it does happen and that might be a time where, say you had been contributing 8 percent. You might have to pair that back, and that's unfortunate, but it's much more important than stopping your contributions altogether.

Jess

So is it beneficial to stay with the same contribution if you can avoid like chopping and changing? Or can you change as many times as you want really? And what is the consequences to that?

Stuart

Not really. Honestly, you can change as much as you want.

Jess

So how do the employer contributions work in in comparison with your personal contributions?

Stuart

It's a great question. So just like your contributions are a percentage of your salary, your employers contributions are also calculated as a percentage of your salary. So for many employees their employer contributes 3%. Some places contribute 4, others up to 7 or even 9%, but the typical would be 3%. It can be a little bit confusing because it's 3% for the employee and 3% for the employer and that is a little bit confusing, but it's basically calculated exactly the same way. 
 
 To be really honest, as long as that money is flowing into your KiwiSaver, you don't really need to worry about it. That should happen without you doing anything and it's great that your firm or your employer is contributing. But you know that there's not much action required from you.

Jess

Yeah. And so for someone who's just starting out. We did talk a little bit about the default, but I'm just curious to go into that a little bit more. So, when you get your first job at 18, you're automatically contributing 3%. Is that how it works?

Stuart

When you first get a job that's eligible for KiwiSaver, there are some income de minimis. That's a silly economics word, that means lower bound.

Jess

What does that mean? Jargon to me Stuart.

Stuart

Yeah. I'm sorry. I'm sorry. I mean minimus we could do away with that. Once the KiwiSaver your first KiwiSaver is opened up, you will be placed into a default fund, and unless you make a change, your contribution rate will be 3%.

Jess

So, what are the benefits if you contribute more than the minimum of 3%?

Stuart

So, Jess, are you a good saver?
 
 Jess
  Yes. Id like to think I am.
 
 Stuart
 Right. Excellent. I can tell you being a good saver. Well, I'm sure you are absolutely being a good saver will set you up for your financial future.
 
 If you're a really good saver, you have to think about whether it's appropriate to contribute more to KiwiSaver. So let me explain what. If you're a really good saver and you're able to save money and you're able to put that money away and not use it for a new outfit or an emergency holiday. That's really good. So if you put more money into your KiwiSaver, you won't be able to access that money, perhaps say in an emergency. So you have to think about if I'm a really good saver, there might not be much of an incentive for you to put more money into KiwiSaver, because if you put it into another savings product you will have better access to that money.

Jess
 Gotcha.

Stuart

However. If you'd have said Ohh Stuart, I really struggle to save well then I would really have encouraged you to put more money into your KiwiSaver because you can't access it. 

Jess

Because you can't access that. 
 
 Stuart 
 That's exactly correct. So it's a good example of how different situations are the right answer for different people.
 
 Jess
 So there's a lot of information you dumped on me today and I'm getting a better handle on KiwiSaver, but could you just nicely summarise with a little bow on top, what you explained to me today about contributions.

Stuart

Absolutely so. Just because you're in your 20s, but honestly, for anybody sort of in their 20s or their 30s or their 40s, let's say. They should think about how much they can afford to contribute to KiwiSaver, so that's probably thinking about things like do I have an emergency or a rainy day fund? Am I contributing some money to a different savings account? So if somebody's able to put some money into each of those different savings related goals, then that would be really good. The exact amount that you are putting into your KiwiSaver is probably a function of trying to keep some balance amongst those different savings goals.

Jess

OK.

Stuart

You've got to put in from the employee that that's your contribution. It's got to be 3,4,6,8 or 10%. If you're a good saver, maybe towards the bottom of that and putting some money into a different savings product. If you really struggle to save might be a good reason to put some more money into KiwiSaver.

Jess

Thank you so much for listening today. If you'd like more information, head to our website www.fma.govt.NZ. We'll see you next time.