Read more Oily Rag articles by Frank and Muriel Newman
“What do I do with all of the savings I am making by living off the smell of an oily rag?” That’s a question we are often asked, so we thought we should traverse the slippery slope of retirement saving, and KiwiSaver in particular.
We are pretty keen on KiwiSaver because the words, “free money” come up. In fact we think it’s something everyone should have, so here’s a quick run-down on how to turn your oily rag savings into retirement savings.
There are some pretty good financial reasons to open a KiwiSaver account. Firstly the government will give you a $1,000 to “kick-start” your fund. Yes, $1,000, free!
But that’s not the end of the free money. When you start contributing into your KiwiSaver account (2, 4 or 8 percent of your salary or wages) they will also give you up to $20 a week ($1,042.86 a year) as a tax credit.
And, there’s more. If you are employed (and over the age of 18) your employer will be required to contribute the equivalent of 2 percent of your salary into your fund. That’s on top of what they pay you already.
In other words, there’s a lot of other people’s money going into your KiwiSaver account, for you to keep! Self employed people can also receive those benefits, but of course not the employer contribution.
The thing is that anyone of any age can open up a KiwiSaver account and benefit from the $1,000 kick start and tax credit. For example a grandparent could open up a KiwiSaver account for a newborn with a deposit of say $10. The government will put in $1,000. Even if no more contributions are made until the child starts work at say age 18, as a result of the compounding of interest, the $1,000 will have grown to be over $3,000!
However, KiwiSaver is not all roses and chocolates – there are a few negatives. The main one is that KiwiSaver is a superannuation scheme and is locked in until the age of 65. Those wanting to retire before then will need to save and invest elsewhere.
The other negative is KiwiSaver funds are not guaranteed and nor is there a guarantee about performance. So far the performance has been a bit patchy and in the long run the returns are not likely to be spectacular – but the amount of free money going into the account is likely to counter this.
To a 20 year-old, 65 will seem like an eternity away, but they can “unlock” their KiwiSaver funds to buy their first home. Not only that, but the Government will give more free money (up to $5,000) to help with the purchase – per KiwiSaver account (so a couple could receive up to $10,000 free!).
That means a couple who have not owned a home could both opt into KiwiSaver, put in 2 percent of their salary for 5 years, then use their contributions, plus their employer's contributions, plus the $5,000 subsidy to purchase their first home. For most people that will be tens of thousands of dollars in free money.
There are a few conditions: they must have been in Kiwisaver for at least 3 years, and the funds can only be used to buy a “cheaper home”, which they must live in for at least six months.
With the tough economic times making it harder for people to make ends meet – and much harder to put together enough money for a deposit on a home – having a KiwiSaver fund could make things a little easier.
If you have some favourite money-saving or money-making tips, share them with others by visiting the oily rag website (www.oilyrag.co.nz) or write to Living off the Smell of an Oily Rag, PO Box 984, Whangarei.
*Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.