If you’re young, retirement savings are probably low on your list of priorities. But, it’s giving ostrich.
When you’re in your teens and twenties, the pay is often low, and your priorities are sometimes more about clothes, socialising, and hobbies. Then, you’ll be travelling, starting to buy ‘nice’ furniture, then a home or car. Then it’s a mortgage and/ or kids and suddenly you’re 35 and don’t have any retirement savings.
It might seem like you can put retirement savings off but there are huge benefits to starting retirement savings when you’re young. Your future depends on the plans you make today; less YOLO and more SOFO (Saving Often (gives a strong) Future Outlook).
We know this might seem boring, so the article is short, and gives you easy steps you can take to set up your future. Things you can actually do, while still having a life. Starting saving when you’re young gives you a huge advantage in setting up your future house, life, and retirement. No avocados will be sacrificed in this article.
TL:DR
- Superannuation isn’t a lot of money, it won’t be enough
- Saving now means you make loads of interest
Superannuation Isn’t Lots of Money
NZ has superannuation, which is the money that gets paid to you every week once you’re 65 years old. As of December 2024, it’s $519 a week for a single person, or $799 for a couple. And that sounds like a lot but it’s not; think about how much rent you pay, or your weekly groceries. By the time you get to 65, the age limit will likely be higher, and the amount paid in real terms will likely be way less. You will need savings of your own, or a nice, insulated box under a bridge somewhere.
Compound Interest Works in Your Favour
There’s this thing called compound interest. It’s your second best friend (time is your first when you’re young). Basically, your principal investment makes money in interest, this gets added to your principal, and then you make interest on your interest. It means that the money you invest now when you’re young is going to make you loads more money than the investments you make in your 40’s (you know, when you’re old).
If you make $50,000 per year and contribute 3% of your income into a growth fund, starting at age 20, by retirement, you’ll have $315,711. That’s $139,079 of your contributions, plus $139,079 from your employer, $23,445 from the government, and the remaining $14,108 is interest.
If you start saving at 35, all other factors the same, you’ll only have $216,532. Even if you contribute 4% instead of 3%, you’ll end up with $255,529. That’s $113,450 of your money making only $12,999 in interest. You also miss out on $113,450 of employer and $15,630 of government contributions- free money you threw away for 15 years.
KiwiSaver is Pretty Awesome
KiwiSaver is ideal because if you choose the right plan, your fees are low, the money gets taken from your wages before it even gets to your bank account, and you can’t sneakily raid it. You can, however, use it for a deposit on your first home.
KiwiSaver also means you get free money. Your employer must contribute at least 3% too, and if you contribute at least $1,043 per year, the government adds $521 a year. This is the best argument for saving at least the very minimum.
It’s also super easy to set up; Choose your provider, the risk level, and your contribution rate and that’s it. Relax for now, your retirement is looking good.
You Can Be More Aggressive with Your Investments
There’s five different types of investment levels for KiwiSaver.
- Defensive
- Conservative
- Balanced
- Growth
- Aggressive
Basically, defensive invests in low risk assets that won’t make loads of money, but keeps it safe. This fund is great for someone close to retirement who can’t risk losing their money. Aggressive, at the other end of the scale, is full risk, designed to make bigger returns. The stock market fluctuates and these long term aggressive or growth fund types are designed to ride out the highs and lows, but still make money overall long term.
The benefit of being young is you can invest everything in your growth or aggressive funds and make loads of money, then switch to defensive funds when you’re older.
Budgeting
Sorry, this is SUCH a buzzkill, but you need to start budgeting. But not the way you think—it shouldn’t be restrictive, otherwise, much like a strict diet, you’re just going to blow it and gorge on a whole pizza (or throw a pair of new boots on that credit card you just got).
Basically, you need to prioritise some savings, and not getting into debt (avoid ‘buy now, pay later’ services such as Afterpay). This will put you way ahead of everyone else for the future. Don’t get too swamped in detail, and just make sure you learn the power of leaving your bank card at home on a night out, and living within your means.
Once you’ve got a good paying job, you will already have some great habits. Saving money will be part of your life, and you won’t be paying loads in interest or debt repayments.
Talk to a Professional
Saving now – even just that 3% – gives you so many more options in your future. I know it’s hard to imagine retirement, but will you be happy sitting at home reading books and growing vegetables (no shade, that’s great), but would you want to travel too? Or will you want to have a super warm house in winter, with no worries about paying the power bill? Do you want the extra money so you can go boating, work on a project car, own a horse, or get a flat white at a café every day? More money means independence, flexibility, and the ability to do more of what you want.
Talking to a professional may seem a bit of overkill, but it sets you up with great habits and helps to create some financial goals. Here at Smart Adviser, we’ll help you set up your contributions and chat about your plans for the future. You’ll leave a bit more educated about finances, and feel good about your adulting skills.