Having some extra money lying around after you pay for all the necessities and any debt or mortgage is taken care of is a great thing. So when you do have that money available to you what should you be doing with it?
A question we get from our clients is if they should invest that extra money into KiwiSaver or some other investments such as property, shares or managed funds?
KiwiSaver as an option
As our previous blog on KiwiSaver stated, there are great boosters and incentives designed to motivate the individual to contribute towards their retirement fund.
Every year, the government contributes 50 cents to every dollar you put in to a maximum of $521 contributed by them. More than $500 a year of free money is a very good thing for you and your savings!
On top of that, your employer has to contribute a minimum of 3% of your gross salary so long as you contribute as well. Some employers even choose to match their employees’ contributions which can be 3%, 4%, 6%, 8% or 10%.
All of the free money from the government and your employer can seriously boost your KiwiSaver account and over time compound to considerable amounts of money.
For the purpose of this blog we want to assume that the reader has already made the most of the aforementioned advantages and would like to know more about why it is a good idea to keep adding money to your KiwiSaver scheme.
There are certain advantages but also some disadvantages to contributing extra money into KiwiSaver.
KiwiSaver vs Managed Funds: What makes KiwiSaver really special and makes it stand out from investing in managed funds yourself is that KiwiSaver is very highly regulated. At $70 billion and growing, KiwiSaver is very important to Kiwis overall retirement needs so the government is doing all it can to make it a very safe investment opportunity.
Being regulated also means that KiwiSaver fees are normally much lower than fees of other managed funds out there. Further competition among KiwiSaver providers and economies of scale should push those fees even lower.
KiwiSaver vs Property: Most KiwiSaver funds are also very well diversified. Your money is used to invest in companies from all over the world and from all types of industries. This makes KiwiSaver a much lower risk investment than, for example, buying a single rental property. With a rental property you are putting all your eggs in one basket, whereas with KiwiSaver you are reducing your risks by diversification.
KiwiSaver vs Shares: KiwiSaver funds are managed by professionals who have vast experience in managing investments and trained to compile the best packages with the best possible risk-return ratios. This is very different from buying and selling shares yourself. There is a lot more risk involved in buying shares in a single company or a few companies, no matter how well you think those companies will perform.
While KiwiSaver is a very advantageous scheme it is important to keep in mind the disadvantages too.
The most important distinction is that KiwiSaver is not as easily accessible as other savings accounts. It is certainly not an asset that you can dip into whenever you need to, something that can be achieved with adequate notice with other forms of investments.
When investing in KiwiSaver, the money is locked into the account until the individual turns 65 or is buying their first home. There are exceptions to this but they have to be situations such as extreme financial hardships, medical conditions that shorten the lifespan of an individual or immigrating permanently.
So what do I do?
If you have enough money set aside for emergencies, and you would prefer to have a simple option for investing - KiwiSaver might be right for you. If you want to invest the money, but might need to access it before what is allowed by KiwiSaver - consider managed funds. If you already have a substantial amount of money invested in the stock market a rental might be an option. If you are just looking to invest a couple of bucks to learn more about the stock market - dip your toes into direct shares.
Ultimately it depends on your personal circumstances and goals. So speak to a financial advisor and get a good understanding of how the different options work and will affect you. Then make a decision.
If KiwiSaver is right for you, then National Capital can help you determine the appropriate fund and provider for you. Our professional financial advice team is here to help. It’s simple to start off, just submit the National Capital KiwiSaver HealthCheck today.