KiwiSaver for kids? YES, please!
05 Jun, 2022
I was invited onto a Sharesies webinar in May to discuss Kids and Investing. I enjoyed the kōrero we had and was pleased that I was able to share personal insights about how I’ve been helping and encouraging my daughter, who is now 14 years old, to not only invest but understand how pūtea works in life.
I believe it is essential that we don’t just teach our tamariki to ‘save’, but we teach them to become ‘investors’ as well. That’s where the money is to be made over time.
Since taking part in that webinar, one conversation thread has stayed with me. It was about whether it is worth signing your tamariki up to KiwiSaver or not.
I was firmly in the YES camp, whereas the other panellists (Frances Cook and Aleisha Rutherford) were not quite seeing the merits for children under the age of 18 that I saw; they would prefer to invest somewhere else for their tamariki. In our house, we have our daughter investing in KiwiSaver AND investments outside of KiwiSaver. In my view, it’s not ‘do one or the other’; it’s ‘do both at the same time’.
Since the webinar, I’ve heard more media commentary about how poor Kiwis (particularly women) are saving for retirement, and I received an email from a subscriber called Sarah. She mentioned how she has signed her kids up to KiwiSaver and shared her reasoning with me. We both see KiwiSaver as the low hanging fruit of the investing world. It’s easy to set up and maintain over time and is a fantastic teaching tool.
Oh, and it works! It grows over time over and above the contributions to the fund as I’ll show you below.
Today I have weaved Sarah’s thoughts in with my own as a way to explain why I am so happy with the decision we made to begin investing on behalf of our daughter into a KiwiSaver fund. We started when she was just one and a half years old. I’d love any adult to consider doing the same for the tamariki in their lives.
KiwiSaver is the same age as my daughter.
KiwiSaver started in 2007, and our daughter was born at the end of the same year. Although I had always thought I signed her up sometime in 2008, looking back in my records to help me write this post, I see now that she didn’t join KiwiSaver until 2009, when she was 1.5 years old. Mum brain! It turns out it was a savings fund I started at birth.
She received $1,000 from the government. New sign-ups, kids included, received this ‘kick start’. Unfortunately, the government scrapped that kickstart in 2015, which is a great shame because it is the main reason people say “it’s not worth joining anymore”.
Not starting makes no sense.
Sarah was straight to the point when she said that she just couldn’t fathom why many people stopped joining their kids up to KiwiSaver when the kickstart payment stopped. It’s even more preposterous if you are waiting for a government to reinstate it! In her view, losing out on making a start because you're worried about not getting 'free money' is short-sighted. By not making a start, your child is missing out on 18 years of compound interest, which given time, will replace that $1,000 kickstart a thousand times over.
Another place where people went a bit wrong was maybe they did get that kickstart. Still, they never made voluntary contributions to the fund, meaning that unless the share markets were performing well, that $1,000 would be slowly eroded by the fees the KiwiSaver provider was charging. If this is you, and if you won’t/can’t contribute to the fund, at the very least, make sure you switch to a fee-free growth fund for your kids.
They should have called it “Retirement Investment”, not “KiwiSaver.”
When the government scheme first began, it was purely to be used for retirement and had they just called it “Retirement Investment”, then perhaps the successive governments wouldn’t have tinkered with it. The ability to pull money out for a first home didn’t start until the rules changed in 2015. First home lenders have since hijacked KiwiSaver.
Regarding my daughter, I’m teaching her that this money is STILL for retirement at 65. It is not for a first home. She can, and is, investing elsewhere for that. I figure that if she contributes every month to her KiwiSaver throughout her working life, she will be a multi-millionaire in retirement. As far as I’m concerned, she can tick “plan how to save for retirement” off her To-Do list already.
Both Sarah and I agree that they can invest somewhere else for a first home deposit; your retirement fund is not the best place to do it. My daughter can already multi-task, so I’m teaching her to invest in two different investments simultaneously: retirement and first home*.
* Readers of my blog will know that we also contribute $50 a month to an ETF, and this fund is meant for either her education or as a ‘kick start’ to a house deposit.
If you are reading this and have already drained your KiwiSaver, what is your catch-up retirement plan?
Plus, who knows, any government could change the law around pulling money out for a first home anyway; I’ve already twice mentioned that they have tweaked the system. Imagine that if you have encouraged your tamariki to stuff money into their KiwiSaver for a first home, they can no longer withdraw it. It’s far easier to invest for a first home somewhere else where you have complete control over using that investment.
Compounding returns need time.
Sarah understands compound interest, and she has figured out that if both she and her kids can contribute to their KiwiSaver funds and have about $30,000 in it by the time they are 20, the potential for compound interest will be insane over their working life. While $30,000 might sound unattainable to some, Jonny and I are already seeing these compounding returns play out in our daughters' fund.
In 2009 Jonny and I set up an ongoing first of the month $40 contribution to her KiwiSaver fund.
A 2010 statement shows that her balance was $1,428.
Soon after, Jonny’s parents also gave her $1,000, which we added to her KiwiSaver fund.
A 2011 statement shows her balance had grown nicely to $3,325. Not bad for a three-year-old.
Since 2011 there have never been any other lump sums added, just the monthly $40 donation from the Bank of Mum and Dad, plus the fund's returns.
Things kept ticking along nicely.
Graph showing the trajectory of my daughters KiwiSaver.
Then her mother started to learn a bit more about KiwiSaver and investing!
I had begun making some decisions with the money Jonny and I earned and spent, and it was only a matter of time before I started to look at our daughter’s KiwiSaver fund and tweak it too. In 2017 I switched her to a “low fee passive growth” KiwiSaver fund (with Simplicity). At the time I made the switch, her balance was $8,360. Not bad for a ten-year-old!
This brings us to the present day. For the first time, she picked up a temporary holiday job and even though she is only 14, they contributed 3% to her fund ($31). She contributed 8% of her wages, or $67, to her fund. Many people believe that employers won’t contribute to KiwiSaver for those under the age of 18. But this is simply not true. Although they are not required by law, many choose to contribute; it is just a matter of asking the employer.
This first ‘proper job’ was another teaching moment. She already knows she needs to invest 50% of any money earned into her Sharesies, which has become a habit. We took it a step further and showed her WHY it is important to get your employer to chip in a bit of pūtea to your KiwiSaver and that she can do the same. Because she has been in KiwiSaver for so long now, I can easily log into her fund and show her the returns or ‘free money’ her fund has already made for her. This answers her question of ‘why would I do this, Mum’?
Jonny and I continue to contribute $40 a month to her fund, or $480 per year. But this won’t continue for much longer. As soon as she gets regular and ongoing part-time work in the next year or so, I’ve explained that she will take over these contributions herself. At that time I will most likely redirect that $40 to the investment where she is saving for uni/first home.
This is why KiwiSaver is so valuable. For our daughter, there have been small, intermittent conversations about KiwiSaver. Her knowledge is slowly building up. Imagine trying to teach investment principles to an antsy 18-year-old who already has one foot outside of the family home? Good luck!
It’s true. Kids won’t get the annual $521.
I know that I look forward to receiving my $521.43 each year (provided I contribute $1,042.86 by June 30th). My daughter has never received this, yet her fund has grown, and one day, 3.5 short years from now (unless the government changes the rules), she will get this benefit too. By then, she will already have a tidy sum invested, so this extra boost will only catapult her investment higher.
If you go to a street parade and they are handing lollies out to the crowd, but you miss out, do you go home in a huff? No, you stay and watch the parade. Joining KiwiSaver, despite lacking a handout, is still worth it!
Return on Investment
Her current balance is $14,869. It did get as high as $16,600, but the bumpy markets of 2022 have made their presence felt! No bother, she still has 51 years to go before she needs this pūtea.
The vital part of understanding her current balance in my mind is that of this $14,869, $4,017 are investment returns gained between 2017 and today (I don’t have a record of returns for when she was with her previous provider).
A balance of $8,360 was transferred to Simplicity in 2017
Since then we have contributed $40 a month without fail, a total of $2,580
Returns for that same period are $4,017
Her returns are now greater than our contributions. Even in a down market. Which should put to rest the argument that “it’s not worth contributing if you don’t get the $1,000 from the government”.
This is why I honestly believe that if you have the means to do so, contributing just $10 a week to the KiwiSaver fund for a child is worthwhile. Even $5 a week will add up over time. Even better if you can pop a wee lump sum in at the beginning. Because of compounding investment returns, starting early only becomes more worthwhile with each passing year.
This is what makes it ‘worth it’ for Jonny and I and why I think others are short-sighted not to see the benefit of KiwiSaver. Because we have facilitated her starting as early as we can, even this tiny amount of money is compounding and growing and producing more money. It’s a snowball.
I understand that not everyone can do this.
I absolutely appreciate that many parents can't contribute to a retirement plan for their tamariki, but for many, they could. Could you do this for your kids? For us, we made a conscious decision to ‘spend’ this $40 each month until she can take over the payment herself. We have factored it into our monthly budget.
Sarah has also been investing a small monthly amount for her two pre-school-aged children and says they each have a “nice wee sum already”. Even without the government’s $1,000, it’s still worth doing for her.
If you don’t have the means to contribute, it doesn’t give you a pass on educating your tamariki. You can use your KiwiSaver fund to teach. Once a month, talk to your kids about your fund, how it works, how much your employer puts in, how much you contribute from your wages. This way, they understand how this investment works, which will come in handy when they sign themselves up one day.
Either you teach them about money, or someone else will do it for you.
Sarah gets the same questions as I do about “why we are ‘locking up’ money in a KiwiSaver fund until retirement age?”
She said that this is EXACTLY why she is doing it. They can’t touch it.
And she figures that while she has a young and captive audience, she has years ahead to let them learn the value of a buck and teach them how investing works. Her children also have investments with Sharesies, which Sarah contributes to and where she has set the handover age at 25. She is giving herself as long a runway as possible to teach them.
Education and kōrero about pūtea play an essential role, and both Sarah and I plan on using both KiwiSaver and investing outside of KiwiSaver as a teaching tool. Already, my daughter knows roughly what KiwiSaver is about, that it is an investment created for her retirement.
She popped into my studio as I wrote this up, and I asked her what she knew about KiwiSaver. “I have to wait until I’m 65”, she said. Yep. I’m mindful of making sure I give her a sense of ownership of her investment, even if she can’t yet remember the login details or know the difference between a voluntary contribution and an employer contribution. I’m telling her instead, “it’s there, it’s yours, and you will get to use it later in life”.
Even though my young girl can’t possibly comprehend being ‘old’, I simply tell her in a matter of fact way that from every pay, you set aside a small portion, then let it build up over time.
Just do it, don’t overthink it.
She knows how much is in her fund; she knows we contribute to her monthly; she filled out the paperwork with her first employer and ticked, “yes, I want to contribute to my KiwiSaver”. When I do our net worth update on the 1st of a new month, I also run a separate chart for her, and I tell her how her KiwiSaver and other investments are performing. Her current net worth is $28,000, not bad for a 14-year-old, right? Knowing her numbers and contributing her own money to these investments means that she is actively engaged in its growth; they are not just numbers. They are HER numbers.
That is how you get buy-in to the idea of investing. It is how you create savers and investors instead of spenders.
If all goes well, Sarah hopes to teach her kids well enough that when they take over their KiwiSaver account, they will have hopefully worked out that they might not even need it in the short term for a home and can just leave it be to compound and grow over time, because over time she will show them that you can run several investments for different purposes alongside each other. You can’t teach about KiwiSaver in isolation; it is part of many money lessons in Sarah’s whare.
She is mindful that despite her plan to teach and guide her kids on how to be good with money, they may make some mistakes. But neither of us wants to teach nothing and watch them make big mistakes when it can financially hurt for many years to come.
Time will tell…
I know that many parents save and invest for their kids in secret. Why? The biggest fear seems to be that if their kids knew about the money, they would want to spend it all. I think this is incorrect thinking. I took the view early on that if our daughter knew about the money we are setting aside for her and played an active role in it, this would give her buy-in and ownership of her investments. And this appears to be the case.
When I tell her in passing what her KiwiSaver fund balance is for the month, that it is up or down on last month, and even though we only put in $40 a month (plus her recent contributions), it is up $2,109 on the same time last year, she mulls it over. She does some quick mental math. At that moment, she understands that over time it is growing. She is becoming accustomed to hearing those numbers.
When the time is right, Jonny and I will gladly hand her the reigns of all of her investments, letting her fly solo but telling her we are there for guidance if needed. I know I’ve done my level best to give her a decent education about money, a financial head start and a good overall view of where retirement savings fit within any decent financial plan. I estimate that by 18, she should have about $24,000 in her KiwiSaver fund, which gives her a fantastic base to build upon for retirement.
So, have I convinced you to consider enrolling your kids into KiwiSaver? Let me know in the comments below!
