Q) Hi, My wife has just given birth to our first baby. It told my colleagues I was going to enroll her in KiwiSaver as a present. They thought it was a laugh but then realised the beauty of compounding interest. I was wondering if there were general guides/strategies you could recommend for this case? It seems a $2 a day contribution would go a long way until she was 18 or even over her lifetime. Thanks
A) Congratulations on the birth of your first child. Exciting times.
Despite the mockery of colleagues, you are wise to start thinking of your daughter’s long-term financial security. Folks have different opinions about how much financial support they ought to give their offspring but with the exponential cost of living these days, you could be sparing your daughter a life-time of debt later on. And yes, even $2 a day will go a long way.
New security laws in New Zealand prohibit us from giving you specialised advice on KiwiSaver strategies and specific funds and allocations. You'll need to do your homework I'm afraid or else seek some professional guidance from a financial advisor. As a starter, you can check out our KiwiSaver section and explore the different funds on the market to get a flavour for what's in them and what they return.
But I can reassure you that the earlier you start saving, the better you, or in this case your daughter, will fare in the long-term. Compounding interest is indeed a thing of beauty when it works in your favour. For that reason, and I'm speaking in general terms here, many fund managers maintain a KiwiSaver fund that has a high exposure to equities will stand you well if you have time on your side. That's owing to the fact that equities have, historically, produced better returns over long periods of time. Fund selection is a discussion best had with your provider, a financial adviser or someone whose financial opinion you trust.
Money wise, to give you an idea of how much she could bank I used the regular savings calculator on the Retirement Commission's Sorted website. I put in $1,000 (which is what she’ll get with the kick-start) and assumed a real rate of return (after fees and taxes) of 3.0%. From now until your daughter turns 18, those regular NZ$2 a day contributions will grow to NZ$15,740.53. Plus, she’ll earn another NZ$5,237 in earnings on that.
So your toothless grinning bundle of joy could reasonably expect to have $20,978.38 (in nominal dollars) in the bank when she turns 18. It's not an insignificant sum of money that could be used as a first-time home deposit particularly if there was a partner (obviously not something you want to contemplate for awhile yet) on the scene to match that.)
When she joins the workforce and starts making more sizable KiwiSaver contributions of her own, with the added benefit of employer contributions plus NZ$1,043 in tax credits, her KiwiSaver pot will really take off.
On sleepless nights you can play with the Sorted's KiwiSaver calculator, conjure up some hypothetical salary scenarios for your future Nobel Prize laureate and see how she’ll fare in retirement. That in itself might help get you through the tough parenting years ahead.
If you are a regular to this site, you’ll know the scheme is not without its flaws or critics for that matter. The classic arguments against KiwiSaver are: a) that it’s future and those juicy benefits are not assured and that b) fees and expenses charged by the provider will rob your returns over a long period of time. (To see how much fees reduce your savings by see our cost benefit calculator).
In the absence of a better alternative, or a huge inheritance, KiwiSaver is not a bad way to give your bub a leg up on her retirement savings.
At least you’ll have some peace of mind knowing that you did your bit in her younger years to give her a good head start in the savings department. When she turns 18 she can decide for herself whether the scheme is worthwhile pursuing.
Also, when your colleagues start moaning in 15 years time about how they’ll be living with their children forever because it’s too expensive for them to ever move out, you’ll have the last laugh.
Thanks for writing and happy savings.
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