Yes it's great to up your KiwiSaver contribution – but there's a downside

The secret to KiwiSaver is not too little, not too much. Frances Cook explains why that is – and outlines some other options for those savvy people who love to save.

Not too much, not too little, but just right: there’s a goldilocks zone for your KiwiSaver, and knowing what it is can give you more options with your money.

First, let’s start with the good news about KiwiSaver. It's a fantastic scheme, candy-coated with free money to persuade you to take part in it, so you want to make sure you’re putting in enough to get the benefits.

Say if you put in $1042 per year, you get another 50 cents for every one of those dollars from the government (that's the maximum amount, their contribution is capped at $521 per year). That’s about $20 a week from you, which is doable for most people and very worth it.

Then, if you’re an employee, your employer will also match your contribution to KiwiSaver to a legal minimum of 3% of your gross income. And some employers will match your contribution at up to 6% of your income.

Check with HR, payroll, or your boss, just in case you’re one of the lucky few who can get an even higher match. Ignoring this opportunity is like giving up a pay rise, and surely you wouldn’t do that.

But after you’ve hit those cash matches, some of the sparkle of KiwiSaver starts to fade.

Don’t forget, that money is now locked away until you either buy your first home or retire. (For those who've prevoiusly owned a home and want to use their KiwiSaver to buy a different home, there is the 'Second Chance KiwiSaver Home Withdrawal' but eligibility is limited according to a list of criteria.)

But what if you'd like to use those hard-earned (and matched) savings for something else? What if you want to take a career break so you can look after the kids while they’re little? Sorry, no can do. At least, not with that money.

Want to quit your job and start a business that you just know will succede? Well, you can’t use your KiwiSaver for any seed money to get you started. And what if your dream bach becomes available at an irrisistable price? Nope.

There are all sorts of reasons that you might want to save more than 3% of your income. The standard figure that’s recommended for saving is about 10% of your income – way more than you're probably putting into your KiwiSaver.

No one can argue it's wise to save that much (or more if you can). But should it be inside or outside of KiwiSaver?

The answer doesn’t just come down to the dollars and cents of it. It also comes down to your own money personality, and what helps keep you on track.

AMP client adviser Devon Walen says they try to take personality type into account when guiding clients with their investment decisions.

“You may have things sorted, but if you’re a bad spender, KiwiSaver can be a benefit by locking those funds away," he says. "It can be good, to not have the choice.

“You’ve got the other side though, where you’ve got people who’ve got a handle on everything, they want to save for a rainy day or retirement, and being outside of KiwiSaver can be a great option if they don’t want to lock those funds away.”

Basically, do you need saving from yourself? Or do you have a good track record with money, and could benefit from having some flexibility up your sleeve?

KiwiSaver locking the money away could mean that you actually manage to stick to your goals and own that first home or enjoy a decent retirement, because you can’t sabotage yourself and steal it back.

Or it could mean that you feel frustrated by not being able to invest in a more accessible way and achieve other life goals before traditional retirement age.

This can be all well and good, but investing for the first time outside of KiwiSaver can be a little daunting.

It’s fine for me to tell you that investing in the sharemarket doesn’t need to be complicated and can be an important step to enhancing your financial future. But investing always brings some degree of risk, and everyone feels nervous when they put money into shares for the first time.

An intermediate option, to help you take that first step, can be looking for a KiwiSaver mirror fund.

If you’re happy with how your KiwiSaver is performing, many providers also have the same fund, but outside of the KiwiSaver system. Ask your provider about it (they won't necessarily use the term "mirror fund").

Such a scheme means your savings go into the exact same assets that your KiwiSaver is invested in. It's run by the same company, and has the same performance (minus the contributions of the government and your employer). But it’s not subject to KiwiSaver rules of only being able to take the money out at age 65, or for a home.

In my view it’s right back to that goldilocks zone, where this time you’ve got an option that’s not too scary, but not too restrictive.