Increasing my KiwiSaver contributions: is it always a good idea?

Many people assume that increasing their KiwiSaver contributions is always a good thing. But is it? Let’s break down some key factors to consider before deciding to bump up your contributions.

KiwiSaver members can contribute 3%, 4%, 6%, 8%, or 10% of their pay directly into their KiwiSaver account, with the default rate being 3%. You can change your contribution rate every 3 months, so it’s worth revisiting this decision whenever your financial situation shifts. If you’ve recently changed jobs or found yourself with extra cash, you might be wondering whether increasing your contributions is a smart move. After all, putting more in now could add thousands to your balance. But before you make any changes, here are some things to keep in mind.

Reference: https://milfordasset.com/insights/spring-clean-your-kiwisaver 

Think Long-Term

KiwiSaver is primarily designed as a long-term retirement savings tool. The funds you contribute are generally locked in until you’re 65, except in cases of hardship, emigration, or death. This makes KiwiSaver an excellent vehicle for growing your retirement savings, but it also means you need to think about whether you might need access to your funds before retirement. If you anticipate needing your savings sooner—perhaps for an emergency or a big purchase—there may be other financial options that better suit your needs.

Are Your Bases Covered?

Before you consider increasing your KiwiSaver contributions, make sure your financial foundation is solid. An emergency fund should be your priority—ideally, it should cover three months’ worth of living expenses for unexpected situations like medical bills, job loss, or urgent repairs. An emergency fund should be easily accessible, unlike KiwiSaver, where your money is locked in for the long term.

Also, check whether you’re on track with your personal insurance. Your emergency fund and insurance work together to protect your financial health, which could allow you to focus on building your KiwiSaver account once those essential pieces are in place.

Get Rid of Dumb Debt First

Before even considering increasing your KiwiSaver contributions, pay down high-interest debt. This “dumb debt”—like credit card balances, personal loans, and hire purchases—can cost you a lot more in interest than you’d gain from any returns in your KiwiSaver account. The longer you carry this debt, the more expensive it becomes. Paying it off is the best investment you can make to improve your financial situation.

Scenarios Where Increasing Contributions Makes Sense

There are a couple of scenarios where increasing your KiwiSaver contributions could be a smart move:

1. Buying Your First Home
   If you’re planning to buy your first home, increasing your contributions can help you save up faster and meet the eligibility requirements for the First Home Grant. Any spare cash you have could go directly into your KiwiSaver, growing your balance without the temptation to spend it elsewhere.
2. Retirement Planning
   If you’re approaching retirement, have no high-interest debt, and have paid down your mortgage, increasing your contributions could boost your retirement savings. The more you contribute now, the larger your nest egg will be when it’s time to retire.

However, before making any changes, it’s a good idea to review your full financial picture to ensure it aligns with your long-term goals. Consider speaking to a KiwiSaver adviser who can help you make informed decisions about both your contribution rates and the right fund for your needs.

Don’t Forget the Government Contribution

If you’re eligible, the government will match your contributions up to a certain limit each year. It’s an easy way to boost your savings—so make sure you’re contributing enough to receive the full Government Contribution.

PS: Consider All Your Options

While KiwiSaver is an excellent way to invest for retirement, it’s not your only option. If you’re not nearing retirement or buying a home, consider exploring other investment vehicles, like managed portfolios, that offer more flexibility and can be tailored to your specific savings goals and risk tolerance. These options may offer better returns, depending on your time horizon and financial objectives.

Finally, if you’re unsure whether increasing your KiwiSaver contributions is the right move for you, it’s always a good idea to speak with a financial adviser. They can help you assess your situation, recommend appropriate strategies, and ensure you’re on track to meet your goals.

Final Thoughts

Increased KiwiSaver contributions can be a great way to secure a more comfortable retirement, but it’s essential to weigh the decision against your other financial needs. Ensure that your emergency fund is in place, your high-interest debt is cleared, and you’re working toward your long-term goals before you commit to a higher contribution rate. By taking a holistic view of your finances, you can make the best decision for your future.