Why start early?
The contributions you make early in your investing lifetime have the potential to be some of the most effective.
Time is one of the most powerful assets that an investor has.
People who make contributions earlier in life often have to put in less of their own money to get the same or even better outcomes than someone who started later, even if they are contributing more on a regular basis.
The power of compounding
That’s because of the power of compounding returns.
When you invest in a KiwiSaver fund, your returns compound upon each other, year after year.
For example, let’s say you begin with $10,000 invested in a fund that returns 5 percent annually. After the first year, you’d have $10,500. In the second year, the return would be based on the new balance of $10,500, so you’d earn 5% of that amount, which equals $525. By the end of the second year, your balance would grow to $11,025. This compounding effect grows your money faster as time goes on (subject to fluctuations in investment values).
For a 20-year-old starting with a $65,000 salary and contributing 3% of their income, plus an employer contribution of 3%, they could save around $380,000 by retirement, assuming they invest in a growth fund. However, this is an estimate based on assumptions, and the exact amount may vary.
For someone starting at 40 with the same contribution settings, the savings by retirement might only reach approximately $212,000. You can use Sorted’s KiwiSaver calculator to calculation your potential investment balance based on your personal situation.
KiwiSaver contributions
With KiwiSaver, qualifying members aged between 18 and 65 could benefit from both employer contributions and government contributions. If you are a PAYE employee, your employer is required to contribute a minimum of 3% of your salary to your KiwiSaver fund. Additionally, the government will contribute 50 cents for every dollar you put in, up to a maximum of $521.43 per year. Qualifying self-employed individuals can also receive the benefit of the government contribution based on their own contributions, giving a boost to their retirement savings.
Other benefits
Starting contributions early also makes sense because many people’s incomes increase over their working lives.
If you get used to saving a set percentage of your salary early on, the amount you put aside can grow over time without you needing to do anything. As your salary increases, your amount of your KiwiSaver contributions will automatically grow too, helping to build your retirement savings.
Never too early, but timing matters
While starting early gives your investments more time to grow, it’s never too late to begin saving with KiwiSaver. Any contributions you make can still help build your retirement fund.
If you’re 50 and starting out, you still have 15 years until 65 to invest – Sorted’s calculator estimates that someone earning $80,000 and contributing 3%, with an additional 3% from their employer, into a growth fund could save just under $100,000 over that time.
However, it’s important to note that employer and government contributions stop at 65 (although some employers may choose to keep contributing after this age). After that, you can still keep your savings invested and may also choose to continue contributing, depending on your financial situation and retirement goals.
Advice helps
Starting early is a great way to grow your retirement savings, but it’s never too late to start investing. If you’re looking for help to get the most out of your KiwiSaver investment, we are here to guide you. Our team of expert advisers can assist you in creating a strategy to help achieve your retirement goals. The best time to start might have been yesterday, but the next best time is right now.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.