Isbister Partners New Zealand

At what age do you start caring about KiwiSaver?

At what age do you start caring about KiwiSaver?

KiwiSaver Isbister Partner
Notice, I’m not asking when KiwiSaver investors “should” start caring. Investors “should” start caring from the day they start investing. If you apply a sound investment approach from the start, you’ll get a much better outcome in the end.

Unfortunately, most investors barely remember what scheme their KiwiSaver is in, let alone how it’s allocated. While they mightn’t characterise it as a lack of care about their KiwiSaver, it’s fair to say that, in general, they don’t really take much notice of it.

So, when is the “tipping point?” The point when KiwiSaver investors wake up to the idea that returns and thus advice, really matter and they need to start taking this seriously.

Here’s one idea…

KiwiSaver investors will start to care about their investment returns and seek advice when the return they get from their investment is consistently higher than the contributions they make.
So, using this rationale, once your KiwiSaver balance is impacted more by markets than by contributions, you’ll suddenly realise you need to take your investment seriously and seek out professional advice.

And how long does that take? Oh… only about 27 years if you’re invested in a balanced fund.
What? That’s right, it takes about 27 years.

These estimates are always very dependent on assumptions so here are mine. I assume:
  • You restart KiwiSaver at age 30 after purchasing a first home.
  • You earn $100,000 a year in a professional job, and your wages increase every year by wage inflation (inflation + 1.1%).
  • You invest in a balanced portfolio.
  • You put in 3% (matched by your employer) and the government continues to contribute up to $521 per year.
  • Your balanced portfolio earns  3.5%  after fees and tax (the Government recommended projected return).
The graph below shows the breakeven point when average returns become larger than your contributions. The purple line represents investment returns, and the yellow line represents total contributions. The purple line only intercepts the yellow line at age 58, or 27 years after the theoretical investor restarted contributions after purchasing a first home.
The little ‘wobble’ in the yellow line has to do with crossing into the 39% tax rate for employer contributions. But one question you might ask is, how would this graphic change based on your investment allocation? The table below summarises these results.
 
AllocationYears until returns overtake contributions…
Defensive (1.5% return)Over 70 years, so pretty much never…
Conservative (2.5% return)45 years, so basically never…
Balanced (3.5% return)27 years 
Growth (4.5% return)20 years
Aggressive (5.5% return)16 years
 
This analysis is not sensitive to your starting date or to your salary level. But, surprisingly, it’s also not sensitive to your contribution rate. You would think that if you contributed more, it would take longer for investment earnings to outstrip contributions. However, as you contribute more, there is more to invest, so the impact of returns also increases in step with increased contributions.

Once you’ve been in KiwiSaver 16 years and are a growth investor, you start to enter that space where the purple line begins to compound up and the investment return starts really affecting your balance.

It just so happens that KiwiSaver has been around now for 16 years. If you’ve been invested in your KiwiSaver for 16 years, now may be the time to really think about that return and get some advice.
Here’s another way of thinking about the same topic.

As an example, I’ve optimised a theoretical KiwiSaver investor. In this scenario they have a starting salary of $100,000, they contribute 6% and their employer contributes 3%, are in an aggressive allocation, increase their wage by wage-inflation, etc.

In this scenario, over the first 15 years of their KiwiSaver journey they grow their balance to about $230K. Not bad. Over the next 15 years, the balance increases by 4 TIMES that amount to about $865K. That’s right, the second 15 years is about 4 TIMES as important to growing wealth as the first 15 years.
Are you starting your second 15 years now? With KiwiSaver only about 16 years old, I’m not sure that investors are prepared for the difference the next decade and a half will make to their balance if they do this right.

The purpose of advice is to ensure that you optimise this journey and stay the course, because the subtle delusion in the chart above is that the journey is a smooth one. It will be anything but. Nevertheless, with a strategy, discipline, and a long-term plan, it can happen.

So, to revisit the question we started with, at what age do you start caring about KiwiSaver?

Although the professional in me says any age. The pragmatist recognises that doesn’t appear to be true for non-investment professionals.

But the insights here are that (1) over time the returns you achieve for a growth investor will overtake the contributions you make, and (2) since returns compound, the next 15 years will have a much bigger impact on your final balance than the last 15 years.

Now may be the time to get professional financial advice to ensure that you are getting as much out of your KiwiSaver as you (and your future retired self) will want.


Disclaimer:  This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don’t take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns. 

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