This year’s Money Week theme is debt. Debt, as most of us know, is the heaviest element in the universe. When it’s hanging round your neck it’s a black hole of stress: when you finally get rid of it the feeling is incredible. Traditional financial wisdom says that paying off debt should be a priority, above most types of investment: but is KiwiSaver a special case?
The quick spoiler version: yes. Even while clearing debt, you should look at trying to keep up with your KiwiSaver investment, to take advantage of the extra benefits it offers.
Paying off debt is smart
For many people, home mortgages are the biggest debt they’ll ever have (let’s not get into what generations X through Z owe baby boomers for the gift of a broken housing market, at least not here…). Mortgages are large and stressful: it can be tempting to look at yours and think about reducing your KiwiSaver contributions to pay down the loan faster.
The general principle of reducing your debt is smart, because the interest rate on your mortgage is probably more than the returns from most types of investment (and by the way, if your biggest debt is credit cards rather than a mortgage, PAY OFF YOUR CREDIT CARDS). Taken just by itself, KiwiSaver could fall into the category of an investment with a lower ‘return’ than paying off your mortgage. But the secret sauce is in the extra benefits that KiwiSaver offers.
KiwiSaver - the extra benefits
When you’re paying off your mortgage, no one else is helping you. But KiwiSaver comes with extras from the government and your employer, plus the magic of compounding returns.
Your employer matches the money you put in, up to 3% - or possibly more - of your pay. Then there’s the maximum $521.43 member tax credit the government gives you if you contribute $1,042.86 each year to your KiwiSaver account. Both of these are effectively ‘free money’ as far as you’re concerned, and over time, as they compound, they can make a huge difference to your retirement.
If you stop contributing to your KiwiSaver account, you’ll miss out on these benefits, and added up, they’re what usually makes it worth keeping up with your KiwiSaver account. This means making enough KiwiSaver contributions to get the extra benefits, then putting the rest of your money to work on repaying debt.
Finding the right mix
If you’re employed, contribute at least 3%, or higher if your employer matches a higher rate. Also, top up your account if you need to for the maximum government tax credits, contributing at least $1042.86 to get that 50% return from the government ($521.43) each year. If you’re self-employed, there’s no employer contribution, but make sure you’re paying enough into your KiwiSaver account to get the government payment.
You can see some more in-depth numbers on this in Sorted’s great piece about KiwiSaver and debt.
At Kiwi Wealth, we believe in being practical and prepared for your retirement. Making sure your KiwiSaver account is set up in the right way to suit your needs is a good way to start and we give our members the tools to do this.
This includes our online Future You tool, which shows our members – age 18-65, who haven’t made an Aussie super transfer – not only what their future income from their KiwiSaver account could be, but also the type of lifestyle that it could afford them. You can find out more about the tool here.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.
Kiwi Wealth Limited is the Issuer and Manager of the Kiwi Wealth KiwiSaver Scheme (the Scheme). The Product Disclosure Statement for the Scheme is available from kiwiwealth.co.nz.