Comparing KiwiSaver Returns - What Does It Mean?
There are many confusing terms when it comes to KiwiSaver. You’ve likely heard about returns, but maybe are a little foggy on what it actually means. In classic BetterSaver style, we’ll put it in plain terms.
First, the basics. What is a return?
Basically it’s the money you make or lose on an investment, over a period of time. A positive return means profit while a negative return means money was lost.
Your KiwiSaver is an investment. A fund manager invests your money on your behalf with the intention of growing your investment over time, so that you can buy your first home or set yourself up for retirement.
Every KiwiSaver fund has a rate of return. And most fund managers would like you to believe that their fund has the best returns because, well - they want you to invest your money with them. So they paint it in the best light possible, like any good salesperson would.
One way they can do this is by promoting their 3-month or 6-month return figures, rather than 3-year or 5-year returns. While their short term history might look good, it doesn’t mean much if their longer term performance hasn’t been great.
But even if a fund has excellent returns over the last 3-5 years, that doesn’t mean it’s going to continue to bring in positive returns. It would be nice if it did, because we would all be much better off financially with such easy to predict outcomes.
So how can you figure in returns when choosing a KiwiSaver fund?
BetterSaver has it all sorted for you.
Returns & compound interest - why it matters
Why does the rate of return matter? Because when combined with compound interest, it can make a big difference to how much money you end up with. By big, we mean potentially lots of zeroes.
Over in this week’s pod, our financial advisor Jade explains compound interest like this:
“So let’s say you invested $100 for one year, and you got a 7% return. That’s great. But the magic of compound interest is that at the start of the second year, you’ll have $107 invested. If that grows another 7%, that year, you’ll have just over $114. So you make returns on your initial investment, then your investment balance grows, and you make returns on your initial investment, plus the returns you’ve made so far.”
Basically the interest doesn’t just grow on your initial deposit - it gets added back into your balance and earns interest on top of itself, multiplying your investment value.
So, if you’re regularly contributing to your KiwiSaver over your working life, there’s a lot of compounding going on. If you start when you’re 25, that’s 40 years of your money just earning you more money!
But, if your investment has a negative return, you guessed it - you lose. Compound interest multiplies your gains or losses over time. It’s much the same as when you carry credit card debt and those high interest charges are added on to your balance every month, making it harder and harder to pay off.
Comparing KiwiSaver funds based on returns can confuse even the savviest financial whiz. BetterSaver’s founder Joe Taylor expressed how his frustration drove him to do something about it in a recent article, saying “KiwiSaver is confusing, that’s why I started BetterSaver. I got frustrated seeing one provider promote their three-month returns, and their six-month returns, with both saying they were the best. I got frustrated trying to navigate comparison tables, and I’m a finance nerd.”
Returns are one important thing to consider when choosing a KiwiSaver provider, but it’s not the only consideration. There are multiple factors to figure in, and that’s why the next section is the most important.
Get financial advice
The number one way to make sure you’re making the best investment decisions is to get financial advice.
A financial advisor mines the data and does the searching for you. They look at a fund’s history, fees, risk level and returns. Then they go the extra mile by taking into account your goals, timeframe, risk tolerance and personal values to make sure you choose a fund that will allow you to meet your goals while investing your money in areas you are ok with.
A holistic approach is required to consider the many factors when choosing a KiwiSaver fund - which is exactly what BetterSaver does for you.
At BetterSaver, we believe that financial advice should be available to all Kiwis to help make good financial decisions. Making good financial decisions means a better future, with more Kiwis able to buy their first home (if they choose to) and live independently in retirement.
There are over 250 KiwiSaver funds to choose from, so it takes a lot of work to sift through the information to compare them. We love analyzing spreadsheets and crunching numbers. And we’re really passionate about helping every individual get into the right KiwiSaver fund. We want to know about what you want for your future, what your lifestyle is like and what you value. This way we can recommend the best KiwiSaver fund for your personal circumstances.
Try our fund finder quiz and let our expert team do what we love while saving you the hard work.