Compound returns and KiwiSaver, explained

Time heals all, they say. But did you know it can also grow your KiwiSaver balance, thanks to compound returns? Here’s how they work – and how you can harness this savings superpower.

First up, a quick recap on some nifty ways to grow your KiwiSaver account. Your contributions play a big role, of course. Then there are your employer contributions (if you’re contributing from your pay, your employer usually has to contribute at least 3% of your before-tax pay). And then there’s the Government contribution. If you’re eligible, the Government will contribute 50 cents for every $1 you contribute, up to a maximum of a $521.43 each year. 

Employer and Government contributions on top of your own contributions, are just some of the reasons why your KiwiSaver savings can grow so well. But there’s another reason that’s not widely understood: compounding returns. 

Ever come across the term ‘compound interest’? With KiwiSaver, you get compound returns instead  – but it’s pretty much the same concept. These returns can include dividends and capital gains on your investment (as well as interest, if your fund includes assets like cash or fixed interest, e.g. bonds). 

Here’s how compound interest works. Unlike simple interest (where you only earn interest on your initial balance), compound interest has you earning interest on both the money you’ve saved and your interest. Both sets of interest get added to your overall balance, which means next time the interest is calculated, you earn even more. And so it goes. 

With KiwiSaver, it’s the same deal. Your returns are re-invested, growing your overall investment, and earning you further returns over time. 

Disclaimer: graph is for the purpose of illustrating the concept of compounding returns only, and does not account for inflation or any possible fees, taxes, contributions or withdrawals. Returns are not guaranteed, will depend on many factors and may be negative as well as positive.

Reckon those small contributions aren’t making much of a difference? Think again. In the long-run, your regular KiwiSaver contributions help the snowball effect of compounding returns – and these returns can really impact the size of your KiwiSaver balance at retirement, or when you’re ready to buy your first home.

Slow and steady is the name of the game. Start as early as you can, keep up your regular contributions, leave your money in your KiwiSaver account as long as possible – and watch that snowball grow.