A few months ago, the NZ National Party announced a policy that would allow people under the age of 30 to withdraw from their KiwiSaver funds early to make bond payments on tenancy agreements. They proposed that the withdrawal could be used a maximum of five times.
Experts have said the policy dilutes the purpose of KiwiSaver, could reduce Kiwi’s retirement savings and is not a property policy fix.
With that in mind we’ve taken a closer look at why early KiwiSaver withdrawals are generally not a good idea - and why KiwiSaver can be such a powerful saving tool.
The secret to KiwiSaver’s power
The secret to investing effectively for most people usually isn’t placing big bets on individual shares or watching the markets like a hawk. It’s repeating small actions consistently over a long period of time.
KiwiSaver makes doing this easy, since it's automated and inaccessible until you’re at least 65 years old (unless you withdraw to buy your first home or because of significant financial hardship, serious illness (or a life shortening congenital condition).
Once you opt in as an employee, you are required to contribute a minimum of 3% of your pay (or 4%, 6%, 8% or 10% if you would like to) and your employer will also contribute a minimum of 3% on top of your salary or wages (and again more if they chose to).
The government will also contribute 50 cents for every dollar you contribute up to a maximum of $521.43 per year.
As soon as you start contributing a glorious thing called ‘compound interest’ kicks in and helps to supercharge your KiwiSaver account, boosting its growth. Compound interest is the return you get on your investments or deposits, which is calculated on the initial investment amount (plus any interest already earned).
In other words, it’s growth on growth. Because of this compound interest and the growth of your investments increases exponentially (faster and faster) over time.
The problem with early withdrawals
The effect of compound interest increases over time, so it’s great to get investing as young as possible. The earlier you get started and the more you contribute in those early days - the higher your KiwiSaver balance will be when you reach retirement age.
On the flipside, if you withdraw from your KiwiSaver at a young age this can reduce the effects of compound interest and your KiwiSaver balance at retirement.
For example, let’s say you withdraw $2,480 once (four times the median weekly rent in NZ) from your KiwiSaver account to pay your bond at the age of 20. And for the sake of simplicity, let’s say you stay in your rental until retirement and your bond isn’t repaid to your KiwiSaver.
If you were earning market standard ‘high growth fund’ returns on your KiwiSaver your balance would be $10,700 lower at retirement. This difference will of course be less if your bond is returned.
Getting support if you need help with housing
At the moment, you can only withdraw from KiwiSaver before the age of 65 for your first home or if you are under significant financial hardship, have a serious illness or a life-shortening congenital illness.
If you need help with a bond or housing costs it’s a great idea to look into all the other options first. You could:
If you don’t want to get advice or apply for a bond grant, you could ask your landlord to reduce the bond amount.
Disclaimer:
This Why you should think twice before withdrawing from KiwiSaver early is general information only. The views and opinions expressed do not necessarily reflect those of the FSC. It is not intended to constitute legal or financial advice and does not take your individual circumstances and financial situation into account. We encourage you to seek assistance from a trusted financial adviser, legal or other professional advice.
The names of any third parties are additional resources that you access at your own risk and the FSC takes no responsibility for any third party content.
The FSC and its employees make no express or implied representations or give any warranties regarding this blog, and we accept no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrepresentation in this blog.
August 2023
