Kiwisaver bonus a missed opportunity
It always hurts wasting cash on "forgots".
The world is full of fun ways to spend dough, so it stings all the more when our wallets are emptied by pointless waste.
Like forgetting to pay off a high-interest credit card when the money was sitting in another account.
Every year, hundreds of thousands of New Zealanders miss out on free KiwiSaver money.
The last time the IRD checked, a year ago, more than half of eligible KiwiSavers - 640,000 people - hadn't bothered to secure the full $521 they were entitled to the previous year.
"It's crazy," says ASB's executive general manager of wealth and insurance, Blair Turnbull. "This is $521 that you will get that will keep on working for you until you retire."
Technically, the money is not free. To win $521, you must lock up at least $1042 of your own hard-earned money in KiwiSaver, where it will sit until you buy a first house, turn 65, or get into serious financial difficulty.
In return you get a guaranteed 50 percent Government-funded return every year on your thousand bucks.
So why are we thumbing our noses at cash?
Easy pickings To Turnbull it's a "no-brainer".
"You put in $1 and get 50c back. What other investment is going to give you that?"
The last working day to complete a lump sum transfer this year is Friday, June 28, unless you've already been clever and chipped in the equivalent of about $20 a week to your account.
Yet ASB - one of KiwiSaver's biggest providers - estimates about 4 in 10 of its 340,000 adult KiwiSavers will not get there.
For some, it's easy. If you earn a tidy salary and joined KiwiSaver more than a year ago, your minimum contributions deducted by the IRD will get you to $1042 without having to do anything.
This year you would have needed to earn $52,000 to reach the threshold, at the previous minimum contribution rate of 2 per cent, but from next year that drops to about $35,000, paying the new minimum rate of 3 per cent.
But lower earners, part-time workers and self-employed people have a conscious decision to make.
Are they willing to manually top up their accounts to secure a taxpayer bonus?
Set or forget? People who put in less than $1042 a year still get a Government contribution, but it is reduced by 50c for every dollar they fall short.
Without doing a survey Turnbull can't be sure why so many people are not getting there each year. But he suspects many of the people missing out are contractors or self-employed. If you don't work for The Man, you get no additional contributions from an employer and your savings are not deducted from your pay automatically by the IRD. There is both less of a carrot and less of a stick to pay the $1042.
Other people forget.
"When we ask self-employed people and sole proprietors . . . a lot of the time they don't know [the cut-off date] is coming up.
"Or they might have remembered five years ago when the scheme first came out but they thought it [the Government payment] had dropped off," says Turnbull.
They are partly right - the Government cut the maximum bonus in half last year. But the new rate of $521 is not to be sniffed at, he says.
"You put in $20 and someone else is putting $10 against it."
Outside view Of course, Turnbull works for a KiwiSaver provider, which makes money from people's savings. The more you and the Government chip into your account, the more percentage-based fees they can charge.
We asked an independent savings adviser whether putting in at least $1042 a year was as clever as fund managers say it is. The answer is yes, for most people, says David Kneebone, executive director of the Commission for Financial Literacy and Retirement Income, the operators of Sorted.org.nz. In fact, Sorted used to have a calculator on its website pitting saving into KiwiSaver against paying back debt.
They scrapped it because the scenarios when paying back debt won "were so extreme they were ridiculous", he says.
Savings v debt Kneebone can explain why. One of the first tests for an investment is usually how well it stacks up against the cost of your most expensive debt. In other words, unless you are mortgage-free and sans credit cards, investing in anything comes at the cost of paying back some of what you owe. Paying off a loan on which you are being charged 20 per cent interest improves your wealth in exactly the same way as receiving a 20 per cent return on investment - but the return is after tax and after fees with no investment risk, says Kneebone. Unsurprisingly paying back debt usually works out better, once you factor in the risk the investment won't pay off as you hoped.
KiwiSaver is an exception, says Kneebone.
Unless you frequent loan sharks, few debts charge such exorbitant interest rates that they top a 50 per cent return.
Employees actually get a 150 per cent bonus if they are paid an additional employer contribution, says Kneebone.
"We would traditionally say you should reduce debt first unless you're convinced you're going to get, say, 20 per cent plus return in the case of [people with] credit cards." But "even if you're paying 20 per cent or more in interest, it's still not as high as if you put in $1043 and then get employer contributions and $521 from the Government."
When you're divvying up your outgoings, there's almost nowhere else you could put a thousand dollars and guarantee a return of 50 per cent annually.
Returns v freebies Kneebone finds it ironic we spend so much time debating returns, when we routinely turn down a Government windfall. Compared with maximising the taxpayer and (where applicable) employer benefits on offer, it matters little whether you receive a few per cent higher or lower return from being in a growth fund versus a cautious one, or a high-performing fund versus a low one.
In the long run it is very important to weigh up the fees and the level of risk and make sure you are happy with your fund's management, says Kneebone.
But first check you are maximising your benefits.
"We're tending to focus on the performance of individual funds and getting excited about one achieving 5 per cent versus 8 per cent versus 12 per cent," he says.
"The bigger and more relevant question in my mind at this point for the bulk of KiwiSavers, is to make sure they get the maximum incentives before they concern themselves with the returns."
As always, there is an exception. People in immediate hardship might be silly to salt away extra for retirement if it means suffering today.
At present levels Government-funded superannuation is a pay rise for the lowest earners, so sacrificing spending today does not always make sense.
"If you're in a situation where putting anything into KiwiSaver, even $20 a week, is too much of a stretch and is going to compromise other aspects of your life, I'd question whether it is worth it," says Kneebone.
If the point of retirement savings is to smooth your ride through life, it makes no sense to scrimp on essentials now in order to secure a comparatively luxurious retirement. It's worth bearing in mind, though, that your contributions and your employer's (but not Government payments) may be able to be pulled out earlier and put towards a first house, bringing some of the rewards forward into working life.
Before you decide, check out Sorted's KiwiSaver calculator, which will show you what $20 a week plus $10 from the Government might look like by the time you retire, with or without a percentage of salary - or how far $20 weekly could get you towards a house in five years.
"It really is quite extraordinary what it can give you over a short period," says Kneebone.