We set up KiwiSaver accounts for our children, aged 6 and 2, and both have the $1000 kickstart. Currently we put about $20 a week into bank savings accounts for them for the future (for leaving school) but would it be better to put this money in to their KiwiSaver accounts and get a better return to help with buying their first homes, etc?
Well done on setting up your children in KiwiSaver at an early age. I have come across two schools of thought in respect of KiwiSaver for children -- some parents prefer to leave it to their children to join when they start their first job, while others see it as a learning tool and sign them up when they are younger. In my view, your signing them up early demonstrates your belief in the benefits of saving and hopefully they will take that message on board as they get older.
Since the Government abolished the $1000 kickstart, many parents are reluctant to sign up their children as they will need to contribute some funds themselves. Those that do should shop around to find a fund with the lowest administration fees, as these eat into a low balance. Your children do not have that problem as you signed them up in time to get the kickstart.
So should your savings go into their KiwiSaver accounts? This decision comes down to liquidity vs returns. A big downside of KiwiSaver is that it is locked in until retirement except in some very specific situations such as a First Home withdrawal. Your children are just 2 and 6, and it is difficult for you to know what they will do when they eventually leave school. If they choose to go on to tertiary education, this will be a big financial commitment for them -- and you if you wish to help them. A student loan and allowances will only go so far, but KiwiSaver cannot be accessed for tertiary education.
However, you can expect better returns from KiwiSaver compared with a bank term deposit. The objective of most KiwiSaver funds (except for cash-type funds) is to achieve a higher return than the bank. For growth funds this higher return will be over five-plus years and there could be a year or two with negative returns along with the higher returns. We have enjoyed very good returns over the past five years, and growth funds have averaged 9.84 per cent net for the five years to December 31, 2016 (according to the Sorted FundFinder tool -- which quotes returns after tax at 28 per cent and fees). If we can put some numbers around this -- saving $20 per week over 10 years at 3 per cent per annum will give you around $12,000 while 9 per cent per annum will give you over $15,000. Those extra returns are not to be sniffed at, but don't rush down that path if it means you can't help your children as much as you would like to through tertiary education.
