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💼 Understanding Superannuation

Superannuation (super) is a long-term savings scheme for retirement. In NZ, this primarily means KiwiSaver, but also includes employer schemes and private retirement funds. Understanding how contributions grow through compound interest over decades is key to retirement planning.

Key Point: Superannuation grows through three sources: your contributions (typically 3-10% of salary), employer contributions (minimum 3%), and investment returns compounding over time. Starting early makes a massive difference. $100/week from age 25 to 65 at 5% return = $760,000. Same amount starting at 45 = only $206,000.

How Superannuation Works

Three Contribution Sources:

Source Typical Rate Details
Employee 3-10% You choose rate (KiwiSaver minimum 3%)
Employer 3%+ Minimum 3%, some pay more
Government Up to $521/year 50c per $1 contributed, max $521

Plus Investment Returns:

Your super is invested in funds that earn returns over time through:

  • Share market growth (higher risk, higher return)
  • Property investments
  • Bonds and fixed interest (lower risk, lower return)
  • Cash holdings

The Power of Compound Interest

Example: $50,000 invested for 20 years

Return Rate Final Value Growth
3% (Conservative) $90,306 $40,306
5% (Balanced) $132,665 $82,665
7% (Growth) $193,484 $143,484
9% (Aggressive) $280,221 $230,221

Regular Contributions Example

Contributing $200/week from age 30 to 65 (35 years)

Weekly contribution: $200
Annual contribution: $10,400
Total contributed: $364,000
At 5% return: $1,032,000
Investment growth: $668,000

At different return rates:

  • 3% return: $725,000 (growth $361,000)
  • 5% return: $1,032,000 (growth $668,000)
  • 7% return: $1,507,000 (growth $1,143,000)

Starting Age Impact

Same $200/week contribution at 5% return:

Start Age Years Total Contributed Final Value at 65
25 40 $416,000 $1,325,000
30 35 $364,000 $1,032,000
35 30 $312,000 $783,000
40 25 $260,000 $575,000
45 20 $208,000 $406,000

Key insight: Starting 5 years earlier (age 25 vs 30) adds $293,000 to final balance despite only $52,000 extra contributed!

Typical Salary-Based Contributions

Example: $70,000 salary

KiwiSaver at 3% Employee + 3% Employer:

Employee contribution: $70,000 × 3% = $2,100/year
Employer contribution: $70,000 × 3% = $2,100/year (minus ESCT)
Government contribution: $521/year (max)
Total annual: ~$4,700

Over 30 years at 5% return:

Total contributed: $141,000
Final value: $327,000
Investment growth: $186,000

Higher Contribution Rates

Same $70,000 salary at different employee rates:

Employee Rate Annual Total 30 Years @ 5%
3% $4,700 $327,000
4% $5,400 $375,000
6% $6,800 $472,000
8% $8,200 $569,000
10% $9,600 $666,000

Withdrawal and Retirement

When Can You Access Super?

  • KiwiSaver: Age 65 (NZ Super eligibility age)
  • First home: After 3 years for first home purchase
  • Serious hardship: In extreme circumstances
  • Permanent emigration: Moving overseas permanently
  • Terminal illness: Life expectancy <12 months

Retirement Withdrawal Strategies:

$500,000 balance at age 65:

Strategy Annual Withdrawal Lasts
Lump sum $500,000 now Depends on spending
4% rule $20,000/year 30+ years
Conservative 3% $15,000/year Indefinitely
Aggressive 6% $30,000/year 20-25 years
💡 The 4% Rule

Withdraw 4% of balance annually, adjusted for inflation. Historically provides income for 30+ years without depleting capital. $500K balance = $20K/year. Add NZ Super ($28K/year for couple) = $48K total household income in retirement.

Maximizing Your Super

1. Start Early:

Every year delayed costs tens of thousands in lost compound growth.

2. Increase Contribution Rate:

Going from 3% to 6% doubles your retirement savings with same compound effect.

3. Choose Appropriate Risk:

Younger = higher growth funds. Older = conservative funds. Don't be too conservative too early.

4. Don't Take Contributions Holidays:

Lost years can never be recovered. Even small contributions beat none.

5. Voluntary Top-Ups:

Extra $50/week over 20 years = $100,000+ extra retirement savings.

⚠️ Common Mistakes

Starting too late: Delaying from 25 to 35 costs $500,000+
Too conservative when young: Missing growth years
Taking breaks: Contributions holidays hurt long-term
Not maximizing employer match: Free money left on table
Withdrawing for non-retirement: Only for first home if absolutely necessary

🔢 Superannuation Calculations

Example 1: Graduate Starting KiwiSaver

Age 23, salary $50,000, 3% contribution

Employee: $50,000 × 3% = $1,500/year
Employer: $50,000 × 3% = $1,500/year
Government: $521/year
Total: $3,521/year

Growth to Age 65 (42 years) at 5% return:

Total contributed: $147,882
Final balance: $477,000
Investment growth: $329,118

Plus NZ Super at 65: $28,000/year (couple) or $21,000/year (single) = comfortable retirement.

Example 2: Mid-Career Boost

Age 40, $80,000 salary, increases to 6% contribution

Employee: $80,000 × 6% = $4,800/year
Employer: $80,000 × 3% = $2,400/year
Government: $521/year
Total: $7,721/year

Growth to Age 65 (25 years) at 5% return:

Total contributed: $193,025
Final balance: $368,000
Investment growth: $174,975

Example 3: Aggressive Saver

Age 30, $90,000 salary, 10% contribution

Employee: $90,000 × 10% = $9,000/year
Employer: $90,000 × 3% = $2,700/year
Government: $521/year
Total: $12,221/year

Growth to Age 65 (35 years) at 6% return:

Total contributed: $427,735
Final balance: $1,382,000
Investment growth: $954,265

Retirement income potential: $55,000/year (4% rule) + NZ Super = $76,000+/year. Comfortable retirement!

Example 4: Late Starter Catch-Up

Age 45, finally joins KiwiSaver, $75,000 salary, 8% contribution

Employee: $75,000 × 8% = $6,000/year
Employer: $75,000 × 3% = $2,250/year
Government: $521/year
Total: $8,771/year

Growth to Age 65 (20 years) at 5% return:

Total contributed: $175,420
Final balance: $291,000
Investment growth: $115,580

Still builds decent nest egg despite late start. Higher contribution rate helps catch up.

Example 5: Salary Growth Over Career

Career progression from age 25 to 65 at 4% contribution:

Age Salary Annual Contribution Balance (5% return)
25-30 $45,000 $3,521 $19,500
30-35 $60,000 $4,521 $47,000
35-45 $80,000 $5,921 $133,000
45-55 $100,000 $7,521 $289,000
55-65 $110,000 $8,221 $535,000

Result: $535,000 at retirement through steady 4% contributions and salary growth.

🌍 Real-World Retirement Planning

1
Couple's Combined Retirement

Both age 30, planning for retirement together:

Partner A (Higher Earner):

Salary: $85,000, 6% contribution
Annual: $6,821
35 years to 65 at 5%: $775,000

Partner B (Lower Earner, Career Break):

Salary: $55,000, 4% contribution
Annual: $4,221
30 years active (5 year break) at 5%: $293,000

Combined Retirement:

Total super: $1,068,000
Annual income (4%): $42,720
Plus NZ Super (couple): $28,000
Total retirement income: $70,720/year
2
Early Retirement Goal (FIRE)

Aggressive saver targeting retirement at 50:

Age: 28, Salary: $95,000
KiwiSaver: 10% ($12,721/year)
Additional index funds: $25,000/year
Total savings: $37,721/year

At Age 50 (22 years):

KiwiSaver (locked): $475,000
Accessible investments: $1,180,000
Total: $1,655,000

Retirement Strategy:

Age 50-65: Live on accessible $1.18M
4% rule: $47,200/year for 15 years
Age 65: Access KiwiSaver $475K + NZ Super
3
Impact of Contributions Holiday

Taking 2-year KiwiSaver break vs continuing:

Scenario: Age 35, $70,000 salary, 4% contribution

Option A: Continue Contributing:

30 years of contributions
Balance at 65: $331,000

Option B: 2-Year Break (age 35-37):

28 years of contributions
Balance at 65: $296,000
Cost of break: $35,000!

Saved during break: $10,400 ($5,200 × 2 years)
Cost at retirement: $35,000
Net loss: $24,600 due to lost compound growth

4
Fund Type Impact

Same contributions, different fund choices:

Setup: $5,000/year for 35 years

Fund Type Avg Return Final Balance
Conservative (Cash/Bonds) 3% $289,000
Balanced 5% $451,000
Growth (Shares) 7% $737,000

Difference: Growth fund vs Conservative = $448,000 more at retirement! Being too conservative when young costs significantly.

🎯 Test Your Knowledge

Quiz on Superannuation Planning

1. Minimum KiwiSaver employer contribution:
1%
3%
5%
6%
2. Maximum government contribution per year:
$1,042
$521
$1,000
No maximum
3. $100/week for 40 years at 5% becomes approximately:
$200,000
$400,000
$660,000
$1,000,000
4. When can you normally access KiwiSaver?
Age 60
Age 65
After 10 years
Retirement (any age)
5. The "4% rule" means:
Contribute 4% of salary
Withdraw 4% of balance annually in retirement
Expect 4% returns
Pay 4% fees
6. Starting super at 25 vs 35 (same contributions) results in:
10% more at retirement
50% more
Nearly double at retirement
Same amount
7. Growth funds (shares) vs conservative (bonds) over 30 years typically:
Return similar amounts
Return 2-3x more (higher risk, higher return)
Return less (safer is better)
Have same risk
8. A 2-year contributions holiday at age 35:
Costs nothing (catch up later)
Costs $5,000 at retirement
Costs $30,000+ at retirement (lost compound growth)
Is recommended to save money
9. $500,000 at retirement using 4% rule provides:
$50,000/year
$10,000/year
$20,000/year
$100,000/year
10. Best strategy for 25-year-old starting KiwiSaver:
Conservative fund (safe)
3% minimum contribution
Growth fund + higher contribution (6-10%)
Take contributions holiday first 5 years

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