Money Answers: Is it Risky to Rely on KiwiSaver?

In this week’s Money Answers, I’ll be addressing a common concern among Kiwis – whether it’s risky to rely solely on KiwiSaver as their primary savings vehicle. Many individuals have found success with KiwiSaver, but is it wise to put all your eggs in one basket? Let’s dive into this topic and explore the potential risks and alternatives to consider.

Are we putting all our eggs in one basket with KiwiSaver?

One reader, E, raised an important question about the risk of relying solely on KiwiSaver for savings. E and her husband have primarily used KiwiSaver to save for their goals, including buying a house and planning for retirement. They are now in their mid-late thirties and want to ensure a comfortable retirement while also pursuing other dreams such as travel. E wonders if setting and forgetting their KiwiSaver contributions at a rate that will meet their retirement needs is sufficient.

While KiwiSaver is an excellent savings tool that offers valuable benefits such as employer contributions and government contributions, it does have limitations. KiwiSaver is designed primarily for retirement savings, meaning the funds are locked away until retirement. This can be a positive aspect as it prevents individuals from accessing their savings impulsively. However, it may hinder other financial goals, such as retiring early or starting a business.

In contrast, looking at the Australian superannuation system, it’s evident that they enjoy several tax incentives and benefits that KiwiSaver lacks. Australians receive generous tax breaks, with their contributions being taxed at only 15% and their investments being taxed at a lower rate. Upon retirement, they can withdraw their superannuation funds tax-free. Additionally, Australian employers contribute 11% of their employees’ salary, which far exceeds the 3% minimum in New Zealand’s KiwiSaver.

Making the most of KiwiSaver and exploring alternatives

Given these differences, it is understandable to feel envious of our neighbors’ superannuation system. However, that shouldn’t discourage Kiwis from maximizing the benefits offered by KiwiSaver. By contributing up to the maximum employer and government contributions, you effectively double your savings from the start. These contributions, in addition to investment returns, make KiwiSaver a valuable savings tool.

However, once you’ve reached the maximum employer and government contributions, the benefits of KiwiSaver diminish. It becomes crucial to consider diversifying your savings and exploring alternative investment options to meet other financial goals outside of retirement. For E and her husband, this might involve paying off their family home or investing in other vehicles in addition to relying on KiwiSaver for retirement purposes.

Exploring tax incentives and alternatives in New Zealand

While New Zealand’s system may not offer the same attractive tax benefits as Australia’s superannuation system, there are still options to explore. One alternative worth considering is investing in Portfolio Investment Entities (PIE) funds, which often have lower tax rates than other investment types. These funds allow you to pay tax on the investment earnings at your prescribed investor rate (PIR), potentially reducing your overall tax burden.

It’s important to become familiar with different investment options, such as managed funds, shares, bonds, and property, that can complement your KiwiSaver savings. Diversification is key to managing risk and maximizing returns. By spreading your investments across different asset classes, you can mitigate the impact of market fluctuations on your overall portfolio.

Related Facts

• KiwiSaver offers valuable benefits such as employer and government contributions
• KiwiSaver has limitations, with funds locked away until retirement
• The Australian superannuation system provides tax incentives and higher employer contributions
• Considering alternative investment options can help achieve other financial goals
• PIE funds in New Zealand offer potential tax advantages
• Diversification is key to managing risk and maximizing returns

Key Takeaway

While KiwiSaver is a beneficial savings tool, it’s important not to rely solely on it for all your financial goals. Consider diversifying your savings and exploring alternative investment options to meet specific objectives like retiring early or starting a business. Investigate potential tax advantages such as PIE funds in New Zealand and aim to spread your investments across different asset classes.

Conclusion

KiwiSaver is a great starting point for savings, particularly due to employer and government contributions. However, it’s crucial to assess your overall financial goals and explore other investment options to avoid putting all your eggs in one basket. By diversifying your savings and considering different avenues, you can enhance your financial security and work towards a comfortable retirement while also pursuing other dreams along the way.