Back to basics

Martin HawesMartin Hawes
Chair, Summer Investment Committee
May 2020

Sometimes we need to go back to basics. This is especially so in a crisis, a time when there is so much happening that we can lose touch with the “why?” of what we are doing.

Since lockdown, there has been a great deal of comment in the media and elsewhere about a range of KiwiSaver issues: switching risk levels, hardship rules, transferring providers, timing the markets, levels of contributions and Australian Super. Economic uncertainty and volatile markets have created a lot of discussion with a variety of opinions.

As we struggle to find answers to how we should manage our own KiwiSaver accounts, it pays to sit back and think about the purpose of it all.

The basis of KiwiSaver is the KiwiSaver Act 2006. If you look at the preamble to the Act, it becomes very clear why KiwiSaver was initiated: to help and encourage people to save for retirement.

“Save” is the operative word: KiwiSaver is not a get-rich-quick scheme. KiwiSaver is about saving for the long term, making regular contributions through thick and thin and ending up with a bigger sum to enjoy in your retirement.

Remember the key principle of KiwiSaver is that you do not disrupt that virtuous cycle of contributions and returns on returns. You should set your KiwiSaver account in the right fund based on your personal risk profile with the contributions you can afford and then watch it grow.

Your contributions along with government and employer contributions are important in terms of how KiwiSaver works for you. So too is the power of compound interest (returns) over long periods of time.

Compound returns are returns on returns. Returns from your KiwiSaver account are not paid out but instead accumulate in the account. Returns are earned on the total account balance (both contributions and past returns) and so over time, you could expect the amount that you have in your account to grow. And grow.

A KiwiSaver account may seem slow at the start but, as time goes on, the contributions and the compounding returns start to drive the account to higher and higher balances. Einstein is supposed to have said that compound interest (returns) is the eighth wonder of the world. Although Einstein almost certainly did not say that, the way that invested money compounds and grows over time surprises a lot of people.

IE graph v2

Compound returns work – it is the “secret” of many fortunes. However, it works through a steady approach and it does not work if it is disrupted. It is for this reason that KiwiSaver members are advised to keep their accounts and contributions going if they possibly can. Although some people get into difficult circumstances and have to stop contributing or even withdraw amounts, we have to remember that this works against the growth of their funds and will mean a reduced amount in retirement. In some cases, the amount will be sharply reduced.

Changing risk profile can also disrupt returns with potentially poor result. Taking on the right amount of risk is important and you should be wary of changes during times of volatility. There are many people in recent weeks who have found themselves in the wrong fund and had to change. Frequently this has come at a cost.

You should find your risk level and then not change it unless your circumstances change. If your risk level is right, you will be able to tolerate volatility. This means you can ride out the financial storms that come and be well invested to enjoy the periods of good returns. The best way to ensure that you are in the right risk category is to do an online questionnaire (you can find the Summer KiwiSaver scheme Investment Profile tool here).

There are a few things that you need to do to make the most of your KiwiSaver opportunity. Here is a check list to ensure you are on the right track:

  • Make sure you are contributing enough to get the maximum government and employer contributions
  • Keep up your contributions and resist withdrawals if you possibly can
  • Find the right risk level and stick with it until your circumstances change
  • Check that you are with a good provider who communicates with you regularly


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Martin Hawes is an Authorised Financial Adviser. This is not a recommendation to buy or sell any financial product and does not take your personal circumstances into account. All opinions reflect our judgement on the date of communication and may change without notice. Past performance is not a reliable guide to future performance. We recommend you take financial advice before making investment decisions. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page.