As most kiwis know, KiwiSaver withdrawals are allowed for first home buyers. It has almost become an automatic action of first home buyers to use their KiwiSaver because it is allowed. But just because something is allowed doesn’t necessarily make it a good idea.
We will run a side by side comparison of two fictional kiwis – Hayley and Lauren. Both share the exact same information:
Age – 24
Income - $60,000 (after tax; increasing each year with inflation)
Inflation – 2.5%
House purchase: $800,000; 20% deposit; 80% mortgage
Annual savings rate: 30%
3% of income towards KiwiSaver
After fee investment returns: 6% growth fund; 3% conservative fund
Here is where they differ though:
Hayley moves all her investments (including KiwiSaver) to a conservative fund at age 27 to match her investing timeframe of buying a house in 5 years. Lauren’s KiwiSaver remains in growth since she is not using KiwiSaver to buy a house. Only her non KiwiSaver funds are moved to conservative at age 28 (5 years from house purchase).
Hayley uses her available KiwiSaver funds of $42,000 to buy a house. The remainder of the $160,000 deposit to come from non-KiwiSaver investments
Hayley is able to buy a house at age 32 because she has the extra cash from KiwiSaver. Lauren buys one year later at age 33
At age 65, Hayley has $1.65 million in investments and savings. $965,000 in non KiwiSaver and $685,000 in KiwiSaver.
At age 65, Lauren has $1.86 million. $878,000 in non KiwiSaver and $985,000 in KiwiSaver.
Lauren has an extra $210,000 just by not using her KiwiSaver funds.
It delayed her purchase by one year and extended her mortgage by one year, but still just one small difference of not having to move her entire portfolio to conservative for 5 years, like any sensible investor saving for a house would do like Hayley, she ended up significantly better off.
In this instance they both had high retirement balances thanks to a high savings rate, so you could argue a $200,000 difference is not significant. If investment returns are greater than 6%, the difference would be even higher too. For someone with a lower retirement balance it could be the difference between being comfortable or not.
I dislike how using KiwiSaver has become the automatic option for many home buyers. Just realise how small changes to your investment portfolio, like going conservative for a few years, can have a significant impact down the tail end thanks to compound interest. I think this is wildly underestimated based on the number of kiwis tapping into their KiwiSavers.
If you need KiwiSaver fund recommendations , then get in touch today.
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