Get Sorted: How the sausage gets paid

How does the KiwiSaver funds sausage really get made? Photo / Thinkstock

What comes back from your investments doesn't always make it into your pocket

Surprise - you're an investor! Perhaps you knew that.

With KiwiSaver, savers have become budding capitalists, putting in their hard-earned capital and taking a certain amount of risk, with the aim of earning future returns. They just may not realise it.

You may know you're putting money in, and that your employer and the government are contributing. But you may not know exactly how much risk is involved - perhaps too little if you are 20, or too much if you are 60. And what exactly do you get in return for that risk?

There are the costs of paying a fund manager to take care of your money and taxes to pay along the way. Not to mention inflation, which eats away at your buying power over the years.

Let's take a look at how "the sausage gets made", as they say. Someone earning $50,000 who invests for 30 years in a KiwiSaver growth fund would typically end up with a nest egg made up of:

• Their contributions: $79,000

• Their employer's: $65,000

• The government's: $16,000

• Market returns: $476,000

Subtotal: A whopping $636,000!

But here's how it gets paid:

• Fees: $89,000

• Taxes: $97,000

• Time (the effect of inflation): $236,000

End result: A much more modest $214,000.

Obviously, some things that influence your end results are not under your control. I haven't figured out a way to change inflation yet, and taxes are one of those sure things in life.

But how about the fees we pay for fund managers? There you have some options, since you can pick the fund that works best for you. In the KiwiSaver fund finder you can compare your current fund's fees with an average to see how much you're paying. (You can also gauge the right level of risk for your stage in life.)

And for how much you might pay over your entire KiwiSaver experience, you can use this KiwiSaver fees calculator to see how those tiny percentage points can change your results by tens of thousands of dollars.

Investment returns don't all end up in your pocket, so it's worth making a call on how much you're willing to pay for them.

Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and calculators at Sorted - brought to you by the Commission for Financial Capability - at sorted.org.nz.