Whether you’re employed or self-employed, it’s important to understand how your contribution rate could impact your KiwiSaver balance at retirement.
How contributions work
KiwiSaver contributions are the regular amounts you set aside from your income. For employees, contributions are automatically deducted, at 3%, 4%, 6%, 8%, or 10% of your gross salary. As long as you are contributing, your employer is also required to contribute at least 3%, and the government also provides an annual contribution of 50c, for every $1 you contribute, up to $521.43 between 1 July and 30 June each year. As well as regular contributions you are able to make voluntary contributions at any time.
If you’re self-employed, the process is a bit different. If you do not use the PAYE system, you can make voluntary contributions. Setting up an automatic payment can help you ensure that these contributions are regular and made before you’re tempted to spend the money on something else.
If you are self-employed and use the PAYE system, you’ll make both the employee and employer contributions. After being a KiwiSaver member for 12 months you have the option to go on a saving suspension and then make voluntary contributions instead. Either way, as long as you contribute at least $1,042.86 each year, you’ll still be eligible for the government contribution.
The impact of different contribution rates
The rate at which you contribute to KiwiSaver can make a substantial difference to your savings over time. According to Sorted NZ, the difference between contributing 3% and 10% of your salary over a working lifetime can amount to as much as $229,000 for someone on an average salary.
Let’s break this down further with an example: If you earn $70,000 annually and contribute 3% of your salary to KiwiSaver, Sorted NZ estimates that, after 30 years, you could have a balance of approximately $176,312 in a balanced fund. However, if you increase your contribution to 8%, your balance could grow to around $334,593. You can compare different contribution rates based on your situation using the KiwiSaver calculator on our website.
How much will you need at retirement?
To understand how much you should be contributing, it’s essential to consider how much you’ll need at retirement. Check out our previous blog “Do You Feel Financially Prepared for Retirement?”, to explore this in detail. Depending on your lifestyle expectations, you might need anywhere from $400,000 to over $1 million.
You should also think about what an extra $50,000 or $100,000 could mean for your retirement. Could it allow you to travel more, renovate your home, or simply enjoy a more comfortable lifestyle? Even small increases in your KiwiSaver contributions could make all the difference in achieving the retirement lifestyle you envision.
Should you increase your KiwiSaver contributions?
Deciding whether to increase your KiwiSaver contributions depends on your personal situation. If your budget is already stretched, it may not be feasible to increase your contributions right now. However, if you find yourself with a bit more disposable income, perhaps due to the recent tax cuts from the 2024 Budget, this could be a great opportunity to boost your KiwiSaver contributions.
How to change your contribution rate
To adjust your KiwiSaver contribution rate, you can:
If you’re unsure about the right contribution rate for your situation, consider speaking with a Haven Financial Adviser. They can help you put a plan in place that fits your needs and sets you on the path to achieve your retirement savings goals.
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