Should I pay off debt or save in KiwiSaver?
In financial terms, the answer is “do both at the same time” – especially if you are employed.
Before KiwiSaver, you were usually financially better off to pay off debt before putting money into a retirement savings scheme. This was because the after-tax investment income you would earn on your savings wasn’t as much as the interest you were paying on your debt. With KiwiSaver, the old rule changes.
Now, if you are employed, even if you have debt you may be better off financially joining KiwiSaver because of the incentives:
- A $1,000 ‘kick start’ contribution from the government when you join.
- A matching ‘tax credit’ for the first $521.43 a year ($10 a week) of your own contributions (if you are aged over 18).
- Employer contributions at a minimum of 2% of pay increasing to a minimum of 3% from 1 April 2013. (Note there are still benefits in joining KiwiSaver for people who don’t receive employer contributions.)
Need some proof? Check out the case studies below.
It may be the case that the interest you earn on your savings in KiwiSaver won’t be as much as the interest charged on your debt. However, the difference won’t, in nearly all circumstances, be enough to out-weigh the financial benefit you will get from these incentives.
Of course, that’s purely a financial argument. You may feel more comfortable getting rid of all your high interest debt before you start saving for your retirement. Just don’t be put off joining KiwiSaver because you have debt.
Case studies
For the three case studies below we have done the sums to see if each person is better off contributing to KiwiSaver and paying off debt at the same time or paying off the debt first. What we found is that in every instance they would have a greater KiwiSaver balance if they joined KiwiSaver at the same time as paying off their debt.
Jake
Age: 19
Salary: $28,000
Credit card debt: $3,600
KiwiSaver contribution rate: 2% (increasing to 3% from 1 April 2013)
Employer contribution rate: 2% (increasing to 3% from 1 April 2013)
If Jake joined KiwiSaver at the same time as paying off his credit card debt he would have an estimated KiwiSaver balance of $23,100 at the time the debt was repaid (in about 8 years).
If he paid the debt off first, then joined KiwiSaver, he would have an estimated KiwiSaver balance of $20,900 (at the same 8 year point in time).
Outcome: Jake would have a greater KiwiSaver balance if he joined KiwiSaver at the same time as paying off his debt.
Hine
Age: 30 years
Salary: $60,000
Mortgage: $200,000 (20 yrs)
Credit card debt: $3000
KiwiSaver contribution rate: 4%
Employer contribution rate: 2% (increasing to 3% from 1 April 2013)
If Hine joined KiwiSaver at the same time as paying off her debt she would have an estimated KiwiSaver balance of $192,700 at the time the debt was repaid (about 19 years).
If she paid the debt off first, then joined KiwiSaver, she would have an estimated KiwiSaver balance of $140,800 (at the same 19 year point in time).
Outcome: Hine would have a greater KiwiSaver balance if she joined KiwiSaver at the same time as paying off her debt.
Susan
Age: 50
Salary: $90,000
Mortgage: $26,000 (3 yrs)
Credit card debt: $4,000
KiwiSaver contribution rate: 8%
Employer contribution rate: 2% (increasing to 3% from 1 April 2013)
If Susan joined KiwiSaver at the same time as paying off her debt she would have an estimated KiwiSaver balance of $36,300 at the time the debt was repaid (about 3 years).
If she paid the debt off first, then joined KiwiSaver, she would have an estimated KiwiSaver balance of $33,200 (at the same 3 year point in time).
Outcome: Susan would have a greater KiwiSaver balance if she joined KiwiSaver at the same time as paying off her debt.
Find out the assumptions behind the case study calculations.
