Why Is KiwiSaver Like Birthday Cake?

Why is KiwiSaver like birthday cake?

A Self Employed person, in the latter part of the working career asked a question about KiwiSaver. They wanted to know if they should continue to pay into KiwiSaver or pay off their recently increased mortgage first?

Neil Smith assures everyone that if you can't eat, there is no point in paying into KiwiSaver, but KiwiSaver is very different to putting money in the bank, and no one wants to miss out on something very special for lack of advice. So this article is written so you can learn about or be reminded of what makes KiwiSaver so special, even when the mortgage is barking at you.

I'll liken KiwiSaver to eating birthday cake. Birthday cake eaten at any other time of the year is simply not birthday cake! Its simply cake. In the same way, putting money into any other form of savings other than KiwiSaver, when you're between the ages of 18 and 65, is different to putting that money into KiwiSaver.

For starters, those that are in the latter part of their working time, there is limited time to take advantage of the offerings of KiwiSaver. There is only until age 65! Just like your birthday cake is only really special as your birthday cake for about one week.

So with KiwiSaver, it is a limited time offer. It stops being really special at age 65. Once you hit that age, your savings contributions don't get the special status that KiwiSaver provides them.

So what is that special status that a self employed person, or any other adult not already earning money from wages or salary has placed on their KiwiSaver contributions each month?

Its not the $1,000 kick start. That is a great incentive, but that is only given once.

Its the not even the low cost structure that KiwiSaver has, which is a huge benefit for anyone saving money for their future.

Its the $1040 "tax credit" or government gift of up to $1040 each for each person over 18, each year.

So my client asked me if I thought he should tame the barking mortgage, as he's increased his mortgage recently. Are they going to get better value for money placed in the KiwiSaver, or the mortgage?

If they reduce the mortgage balanced owed by $1 he saves 9% in interest each year. In 5 years time, he saved 45 cents. As the mortgage is new, it may take more than $1 to reduce the mortgage amount by $1.

If they increase the KiwiSaver contribution by $1, even when the markets are as up and down as they are right now, they have the assurance of another $1 at the end of the KiwiSaver year for each of the first $1040 per year!

So, if in 5 years time, they have saved $2 for the cost of $1, they are better off by at least 55 cents. But they will have earned some interest on that $2 as well, and so their return is going to be better.

Again, if $1 is paid off the mortgage, and 9 percent is the mortgage rate, 9 cents is saved each year for 5 years.

If $1 is contributed to KiwiSaver, at the end if that KiwiSaver year, another $1 is gifted by the Government so that they are earning interest on $2 for at least 4 of those years.

Therefore, in the interests of saving cash flow, the client might consider reducing their direct debit contributions to $87 per month, or less, depending on how much they have contributed from July 1 to today.

If they have contributed $1040 already this year, they should stop paying for 6 months if they want a break from paying.

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