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Retirement planning basics

May 28, 2020

Worried about retirement? It’s more useful than ever to have plans in place to build wealth for the future.  We explain some of the basics on investing.

retirement planning

When our daily lives are filled with uncertainty, it’s no surprise that many of us are anxious about money.  Taking practical steps to understand your finances can help to reduce your stress levels – and give you the confidence to make decisions you’re unlikely to regret in the future.

If you’re worrying about the impact COVID-19 will have on your retirement, it’s important to get a handle on your investments. Investing is a major way to build wealth, so understanding how it works can help you navigate the ups and downs of the market. 

Saving vs Investing: What's the difference?  

Saving is setting money aside for something you want in the future. With the historically low interest rates at the moment you’ll only get a small amount of interest if you put your money in a savings account in the bank, but you’ll have the security of knowing market ups and downs won’t impact how much  is there when you need it. 

Investing is putting your money into assets – things like shares, bonds or property – that can potentially earn you an income or gain value over time. 

You can invest in shares by directly buying shares through a sharebroker or platform like Hatch – or indirectly, through a managed fund. In a managed fund, your money is pooled with other investors’ money and looked after by an expert fund manager. Not all managed funds invest in shares.

Risk and reward

Investing always has an element of risk. As a general rule, the greater the potential reward, the greater the risk.

One protection against risk is time. If you’re a decade or more away from retirement, you’re more likely to be able to weather big swings in the market. Investments tend to grow over the long term – even after the 2007-08 global financial crisis, markets recovered the value they’d lost within two years. 

Investing in KiwiSaver  

Despite the name, your KiwiSaver account is actually an investment account. It’s a type of managed fund, although unlike other managed funds your KiwiSaver investment is usually locked in until you buy your first home or turn 65. 

There are a couple of advantages to KiwiSaver that you won’t get with other managed funds:

  • If you’re employed, your employer must contribute at least 3% of your salary or wages each time they pay you. 
  • The government will kick in 50 cents for each dollar you contribute, up to a maximum of $521. 

The government doesn’t hold your KiwiSaver money, and can’t touch it – it’s all yours. 

Choosing a KiwiSaver fund

Your KiwiSaver provider is likely to have a range of investment funds, each with a different level of risk. Which one you choose is likely to depend on how long you can invest your money before you’ll need it, and how comfortable you are with risk. 

Watching your KiwiSaver balance dip can make it tempting to move your investment into a more conservative fund, but you could be turning your losses on paper into losses in reality. 

Market downturns give fund managers the chance to buy shares at bargain prices. If you don’t need to withdraw your money soon, it may be better to stay in the same investment fund and wait for the market to recover.

Whatever you choose, don’t let yourself be guided by fear. Keep working towards your retirement by having a plan that takes a long-term view and suits all kinds of market conditions.

Tags: Investing, KiwiSaver, Retirement

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