Making the most of KiwiSaver – how compound returns make small numbers add up quickly

Making the most of KiwiSaver – how compound returns make small numbers add up quickly
Photo credit: Getty

Pay off your credit card. It’s the first piece of advice any budget advisor will give you: credit cards are an expensive way to borrow money, and one of the reasons is compound interest.

While credit card interest rates are quoted on an annual basis, they’re calculated more frequently – usually daily – and charged monthly. So you wind up paying interest on any outstanding interest, and those small sums add up very quickly.

However, when you’re investing, rather than borrowing, compound interest (or compound returns) works for you, rather than against you, says Murray Harris, Head of KiwiSaver and Distribution at award-winning fund manager Milford Asset Management.

Again, little numbers can add up very quickly, says Murray.

"Let’s say you start with an initial investment of $10,000, and you earn four percent every year after fees and tax. After one year, you’d have $10,400; after two years, you’d have $10,816. In 18 years, you would have doubled your money.

"But what if you could earn six percent? This time, you’d have $10,600 after one year and $11,236 after two years. Getting to $20,000 would take just 12 years.

"That small difference in returns spread over a person’s working life might enable someone to take an early retirement or maintain a more comfortable lifestyle for them and their family once they do retire," says Murray.

Milford Asset Management Head of KiwiSaver and Distribution Murray Harris
Milford Asset Management Head of KiwiSaver and Distribution Murray Harris Photo credit: Supplied

At the beginning of March, the government announced that from July next year people not actively choosing a KiwiSaver provider and fund would be enrolled in a balanced, rather than a conservative fund. People who have their KiwiSaver invested in default funds were missing out on "quite a significant amount of money", Finance Minister Grant Robertson was reported as saying.

Murray Harris says it’s important people choose the fund that’s right for them. And doing that can be a lot easier than you think.

Switching providers can often be done online in a matter of minutes. Milford’s website includes a risk profile questionnaire, suggesting which of its funds may fit better with your particular tolerance to risk; a KiwiSaver guide full of helpful tips for how to grow your KiwiSaver investment for a more comfortable retirement; and a KiwiSaver Calculator you can use to check if you are on track for your desired retirement – and if you’re not, what you could change to keep on track.

"There’s no such thing as an ‘average’ investor," says Murray.

"Everybody has different needs: your time horizon (do you intend to draw on your KiwiSaver at age 65 or will you work for longer?); your appetite for risk (your tolerance for loss in the short-term versus higher long-term returns); what other savings and investments you may have, the importance you place on responsible investing … no two people are exactly the same."

Murray says it’s equally important investors review their choices regularly.

"In the same way no two investors are exactly the same, each individual investor’s circumstances are likely to change: those changes might affect the way you want to manage your money."

Murray says Milford offers investors two key points of difference: characteristics helping the company take the Consumer NZ People’s Choice Award for the past three years.

"Firstly, we are active investors. We don’t invest in markets, we invest in companies – companies that we research and understand. Secondly, we back our judgement with our own money. All of Milford’s employees invest in the same funds we offer our investors, so in a very real sense we are invested in their success."

Did you know?

Changing providers or funds might improve your returns over the long-term, but there’s a sure-fire way to maximise your short-term balance as well. The KiwiSaver year runs from 1 July to 30 June: during that time, the government will add 50 cents to every dollar you invest, up to a maximum of $521.43 for eligible investors. 

So, if in the 12 months prior to 30 June 2020 you have contributed at least $1,043, and you're eligible, you will receive the maximum Government contribution of $521.43. If you contributed less, you still receive 50 cents for every $1 contributed. $100 invested becomes $150. If you can afford it, don’t miss out!

This article was created for Milford Asset Management

*This is intended to provide general information only. It is not intended to be viewed as investment or financial advice. Before investing you may wish to seek independent financial advice. Past performance is not a guarantee of future performance.

 

 

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