KiwiSaver or debt?

Imagine you’re holding a dollar in your hand. Where best to put it? The short answer is wherever it gets you the most back.

So what would help you get ahead more – being in KiwiSaver or paying off debt quicker?

Whenever you pay off debt, you are saving yourself the interest you would have paid and moving yourself in the right direction financially. If it’s a credit card, that’s like getting a sure 20% return for your money. If it’s a mortgage, think of it as a 6% return to you when you put that extra dollar there.

But how does that compare with what you get if you put that dollar in KiwiSaver? And now that the $1,000 kick-start is no longer around, does that change the way things look?

Since your KiwiSaver money is invested for you in a fund, it can earn you returns each year. As we ran the numbers for this, we used a balanced return of 4.4% after fees and taxes are paid. So if you looked at just KiwiSaver investment earnings, which are difficult to predict, it would be a better choice to pay off debt.

But with KiwiSaver, on top of your investment earnings, there is also the government’s contribution. Even though the $1,000 kick-start is no longer there, for every dollar you put into KiwiSaver, you get an extra 50 cents, up to $521 each year. In that first year, that is basically like getting a 50% return for the $1,043 you put in.

You also get your employer’s contributions that match the first 3% you put in.

So altogether, say if you were on $50,000 per year and contributing 3% of your salary, thanks to the government and employer contributions adding to the investment earnings, you would be looking at a 117% return over the year. That’s way better value than paying off debt, and to find any other investment that’s guarantees a similar return is impossible (you may want to run the other way if someone offers one!).

Now, let’s say you had a mortgage of $250,000 and you joined KiwiSaver while you paid it off.  After 30 years you’d end up with the mortgage paid and a KiwiSaver balance of $289,000. 

But what if you took your KiwiSaver contributions and made higher mortgage repayments? Say you paid it off, then joined KiwiSaver and put your mortgage repayments into KiwiSaver to catch up on your retirement savings. Well, after 30 years your KiwiSaver balance would still only be $203,000.

So in the end, the answer to the question “KiwiSaver or debt?” is actually “KiwiSaver and debt”. You want to be in KiwiSaver to collect all the benefits. Make sure your annual contributions are enough to get the full returns, then you can use any spare funds to shrink whatever debt you may be carrying.