KiwiSaver and First Home - Invest For Both
18 Apr, 2021
With our house prices continuing to climb, more and more pressure is going on first home buyers to save up the large deposit they need to buy a house. This is hardly news to you I know and this blog post is not really aimed at those of you who are poised and on the cusp of buying your first home, instead, it’s aimed at your far younger children, siblings, nieces, nephews and friends who might also want to both buy a home one day AND retire.
These days we are being told, advised or we just assume that you save up for a house deposit in your KiwiSaver account and when the time comes to buy, you drain your account, apply for any government grants on offer and purchase a house. No mention of the fact you have just obliterated your KiwiSaver retirement investment account and your ‘saving for retirement’ clock needs to start all over again.
Our retirement savings/KiwiSaver has been hijacked by the housing market and people are trying to use the same investment ‘vehicle’ to do both things.
But it can’t and it won’t.
The question I keep asking myself is, why do people use their KiwiSaver as their primary mode of saving for a home deposit when there are equally valid investment options out there which will allow you to do the same thing AND keep your KiwiSaver intact?
Why do we even have KiwiSaver?
KiwiSaver was set up in 2007 as a retirement tool so that when you stop work at 65 you have some additional money to top up your government pension which they start paying you at 65. KiwiSaver is still a really young scheme and it was introduced because the government realised that for many, government superannuation alone would not be enough to keep people in retirement, out of poverty. And they also realised we were all a bit shit at saving and needed some prompting and if we were forced to just put a small portion of our take-home pay away into a KiwiSaver account every single month for our entire working life, then over time it would build up to a substantial amount with the help of time and compound interest. Left to our own devices too many of us never thought ahead to retirement and this scheme made us more prepared. Once we hit the big 65, this money will be a massive boost to our otherwise potentially dire standard of living. If you don’t believe me, current superannuation payments for a single person are just $437 a week.
If you were 65 and had no choice but to retire today, could you live on that alone if you had no other savings?
Who changed the language?
There seems to have been a switch from:
Using KiwiSaver to save for retirement
to
Using KiwiSaver to buy a house
I have met a handful of people actively saving for their first home deposit saying “I’m chucking as much into my KiwiSaver as I can because I’m saving for a deposit”. I don’t think I’ve met anyone who says “I’m chucking as much into KiwiSaver as I can because I want to be able to enjoy a nice retirement”!
Who did change the language? I think we probably all did. People needed to buy a home, they and their banker saw that a lump of cash was sitting in their KiwiSaver account and it, unfortunately, seemed obvious to use that money. So, over time the legislation changed to allow them to do so. It’s just steamrolled on from there and given that the banking industry has pretty large marketing budgets it’s no surprise to me that the general thinking is now that the main purpose of our KiwiSaver is for a first home deposit.
What’s the problem with using all of your retirement savings to buy your first home?
You now have no retirement savings at all, yet you are definitely going to retire one day. This is a problem.
Given the cost of housing in New Zealand, our first home buyers have it extremely tough. They might not be buying their first home until their late 20’s or into their 30’s and by draining their retirement savings to do it they have just committed one of the biggest errors in investment, missing out on ‘time in the market’ and undoing all of the good work that ‘compounding’ has already been doing to their retirement savings. By winding back their retirement savings to close to $1,000, they now have to start all over again.
But can they even spare a percentage of their salary to do this when they are now faced with a hefty 30+ year mortgage? I know of many who simply cannot.
They either opt-out of KiwiSaver altogether for as long as they can and instead divert that small percentage that would have been moved from their pay packet into their KiwiSaver account into servicing debt or running their life. By doing so they then also forgo the employer contribution AND the yearly $521 government contribution. Or, alternatively, they do manage to contribute the minimum 3% of their wages, plus the employer and government contributions but due to their now much later start it is possible that it will simply not be enough to afford them a nice retirement.
If you think I’m wrong, then just look across the ditch to Australia where the minimum amount both employer and employee pay into their superannuation scheme is 9.5% EACH. Because a higher investment rate actually gives you a decent retirement. So, our minimum of 3% + 3% is just not going to cut it I’m afraid. We have to take control of our future and do more ourselves.
Otherwise, we run the risk of reaching retirement age house rich but cash poor.
What are my options for saving a house deposit?
The chances are extremely high that you will want to own your own home somewhere in the world one day. As boring as homeownership sounds when you are young and carefree, most of us do end up buying a house.
And to enable you to do it and still achieve other life goals, there is no easy way around it and you just have to save your tush off from as early on in your working life as possible.
Easy right!?
Remember I said that this blog is aimed at really young people, well in my case, it was aimed at my daughter BEFORE she could even speak or read. That’s what I mean about starting young. Houses are expensive now and only likely to become more so. Same with life in general, life costs money and the sooner we work this out the sooner we can change our mindset to that of an investor and saver so we can prepare for the bills that are inevitably coming our way.
My inbox is FULL of people saying “oh crikey, I wish I started sooner”. Those who realise they have no money set aside in their KiwiSaver and now they are 50 years old, still with a mortgage. Or those who have spent their life spending everything they earn only to realise that the day will soon arrive when they can’t out-earn their stupidity anymore because they can no longer work to earn the money to cover their lifestyle. Or those who sail into tertiary education and accumulate $100,000 in student loans due to, ironically, lack of (financial) education and then realise that interest-free or not, it’s a massive anchor around their necks when they graduate.
For all of these people, money can help.
We don’t want to put it up on a pedestal and worship it as the be-all and end-all. But having money helps make life easier and helps you reach your goals.
Educate yourself. Educate young people.
That is why I take time to educate my daughter and have been teaching her from birth to save a portion of what she earns. Always. You have seen me blather on about this many times in my blog.
Specifically, in regards to housing, it means that for every $10 she earns (by whatever means), $5 is invested into a Smartshares US 500 fund using Sharesies. That is a 50% savings rate that yes, we ‘force’ her to stick to. In addition to this Jonny and I also invest $50 a month into a Smartshares NZ Top 50 fund. Her current balance is almost $9,500. This is earmarked to be used for either tertiary education OR a house deposit. As soon as she starts to earn money in a part-time job, half of her income will go here and these investments will be continually added to and then used when necessary in the years ahead. Up until now, contributions have been small but within the next year or two, these two investments will really start to grow as she starts to earn her first proper income and I don’t expect her to need to use any of this for at least another five years. She has time to let steady investment and compound interest work their magic.
Alongside this, since birth, we have invested $40 per month into a KiwiSaver account for her with a current balance of over $15,000. If she does nothing else but contributes the minimum amount from her future salary she will be JUST FINE in retirement. There will be no need to empty this investment bucket to buy a home because she is already on the path to saving for it in investments outside of KiwiSaver.
From a small seed, a mighty Kauri will grow, IF we just give it time and regular watering.
We are guiding her to form the default habit of investing early in life and I’m pleased to say that it’s already second nature. That doesn’t mean she has not found some hacks and ways around this 50% investment rate though as she now asks for gift vouchers for her birthday instead of cash… How can you invest half a Paper Plus voucher? Must admit, she got me on that one! But that’s OK because she ‘gets’ what we are teaching her and she also understands that we are teaching her to multitask and save for multiple things concurrently. There is not just one pot of money, instead, there are many pots for many different things.
Turbo boost your investments
People like saving for a house deposit in KiwiSaver because of the government and employer boosts and they are the key differences between a KiwiSaver account and a normal investment account. So continue to invest the minimum amount from your wages into your KiwiSaver account and keep those added extras for your retirement while you are saving for your house deposit in an investment account OUTSIDE of KiwiSaver.
Many institutions offer investments that are similar to your KiwiSaver account or you can find an investment like we are using, straight-up index funds that can be accessed at any time. Let the share market turbo boost your investment instead of the government and employer contributions. At $521 a year and 3% of your salary they are small amounts anyway, so let your 65-year-old self benefit from them instead.
With KiwiSaver contributions on autopilot, you can now work hammer and tongs over a long period of time to invest into your “first home deposit” investments instead.
Not so fast Ruth!
Whoa Ruth, hold up, the share market is a volatile and risky space, surely it’s dangerous to put a house deposit at the risk of a fluctuating share market? It might crash RIGHT when needed.
We are warned to be careful when saving for a deposit and not put money at risk, and many think investing in the share market is risky. BUT when you use KiwiSaver as your house deposit fund you are in fact investing in the share market, which has its risks! So confusing.
This is why I find it surprising that people are being advised to use their KiwiSaver to raise a home deposit when the majority of KiwiSaver funds invest in...the share market. How many first home buyers were poised to buy a home in March 2020 when we had a sharemarket crash, lowering their amount invested and postponing their home purchase?
Whether your house deposit money was inside or outside of KiwiSaver it would have been worthless but if you give it time, it will bounce back, which is exactly what it has done.
So, for my daughter, the strategy is to be a LONG term investor both inside and outside KiwiSaver. By starting at birth she has already been in the share market for 13 years and has already ridden the bumps and enjoyed all of the financial gains. This fits right in with my view of not putting money in the share market that is needed within 10 years. And when the day comes that she actually needs to use the money invested she will be looking ahead and planning when she will actually need to deploy it. Before it’s actually needed she can withdraw money and bring it into her bank account which will in effect stabilize it. If today’s bank interest rates are anything to go by, she won’t make money but she won’t lose any either in the short term. She can then keep adding to that house deposit money as hard as she can to increase the size of her deposit as much as she possibly can and then when the day comes to make an offer on a house her money is instantly available to do so. No paperwork involved. She would be a cash buyer.
I read a 2019 statistic that first home buyers withdraw on average $24,000 from their KiwiSaver to buy a house. How can I put this politely? That is not a lot of money in the grand scheme of things and clearly, buyers have raised a lot of money elsewhere to make up their deposit. So, I’ll be encouraging my own daughter to pretend that her KiwiSaver is not even an option and even if it means she has to hold off another year or two to raise that $24,000 to add to her house deposit, then so be it. The money you actually have dictates when the time is right to buy.
Multitasking, that’s the key here!
Doing two things at the same time.
Saving for retirement
Saving for a home
If we just equip ourselves early in life with the information and discipline to plan ahead, both goals are possible to achieve concurrently.
Become a multitasker. Saving for retirement AND saving and investing hard for a home.
Knowing what I know now, if I was going to be taking on debt my primary focus would be on saving as hard as I can from the day I earn my first $1, borrowing as little as possible, buying as cheaply as I can and then killing that debt as soon as I can. Getting the bank off my back as early in life as possible = Freedom.
All the while I’m quietly investing in my retirement and when that housing debt is GONE I’m going to redirect that now spare cash into my retirement AND other investments that are not locked away until I retire. Boom! Kiwi’s are clever and adaptable, I’m sure we have the capability to save for two things at the same time.
When the time came to search for that first house I would have my cash ready to go and would have the seat closest to the auctioneer as I would be primed and ready to bid. And I would not have to put in an offer subject to asking my KiwiSaver provider if I could have my money out of KiwiSaver, please. If there were some other lollies on offer such as first home grants I would look into them, I’m all for free money, but they won’t be the thing I’m relying on to get me the key to my first home.
Now, I may be wrong about all this, I may be out of touch because we bought our first house just before KiwiSaver was introduced. But that is my entire point! At that time we raised the deposit through managed funds and savings accounts. There are different (cheaper) channels available today (index funds) which is why this blog post seems like a completely rational plan to me. If you don’t believe me, ask your parents how they saved the deposit for their first home.
So, please corner the younger tamariki in your life and start to teach them early that one day it is likely that they will want a home of their own and by starting to invest when they are young, they can financially prepare and give themselves a headstart on this, while saving for a far far far off retirement at exactly the same time.
And for those of you poised to buy a home, using my strategy is too little too late and I can see you staring at a pot of money in your KiwiSaver account and seeing it as a completely logical decision to use it, but for everyone else, I say that there are alternatives.
