Many people in KiwiSaver schemes don't get the basics right, says Henry Tongue, chief executive of KiwiSaver provider Generate.
While their mistakes can seem small today, compound interest means they snowball over the decades. In the long run, they can make a huge difference to your retirement income.
He says Generate has identified five areas of Kiwisaver that many savers get wrong.
Choosing the right type of fund
Top of the list is finding a fund with a better return. Most of the time that means a fund with a more aggressive investment strategy.
Tongue says 2.9 million people have KiwiSaver accounts. He says, "45 per cent of them are in cash default conservative funds".
Conservative, sometimes called defensive, funds keep capital safe. You trade security against return. A typical defensive fund might return less than 3 per cent a year.
"In contrast, growth funds can return three or more times as much, albeit with more risk."
Tongue says this means most of that 45 per cent of members are in the wrong funds because they have so long until they retire. The return on a growth fund is far higher over the long haul.
He uses the example of "Sarah", a 30-year-old earning $55,000 a year.
If Sarah puts her KiwiSaver account into a conservative fund with the average sector return of 2.94 per cent, she will retire with a little over $231,000. If she invests in the average growth fund with a return of 7.65 per cent, the same amount of savings will be worth over $565,000 on retirement. That's more than double.
Conventional wisdom says younger investors should opt for growth, while older people might prefer the security of keeping their capital intact. Tongue says the problem with this is that we are living longer.
"Everybody has got until 90. Our kids can expect to get to 100. That means you have to fund 25 years after you hit 65."
He says his experience at Generate shows that when people hit 65 they are not taking their money out of KiwiSaver and blowing it on a big overseas trip.
"They're leaving it there and they are either drawing down so many dollars a month or they use it to pay for bills like new cars".
So staying with an investment in a growth fund often makes more sense.
Get a fair deal on fees
Tongue says savers often look at the fees paid to their fund manager without considering the relationship with return. He says a better measure to look for is the net return after fees.
"The FMA [Financial Markets Authority] came out with an online selection tool and it is all based on net returns after fees. That is, what you get as an investor after all the fees are paid", he says.
While it might look like a lower-fee fund is a better deal, if you choose a provider on fees alone, you can miss out.
As an example, he quotes two funds: the first has a 6 per cent return, with fees of 1 per cent. The after-fees return is 5 per cent.
The second fund has an 8 per cent return and fees of 2 per cent. The after-fees return is 6 per cent.
Tongue says: "If you're comparing funds, make sure you are not comparing fees alone.
Look at the net return. This is a mistake a lot of people make."
Choose the best contribution rate
For now, savers have the option of contributing at 3, 4 or 8 per cent. Six and 10 per cent contribution rates are on the way.
Tongue says many people in KiwiSaver think that once they are are in a fund, they don't have to do any more. But increasing the contribution rate makes a huge difference to a saver's retirement income.
Let's look at how this works for Sarah. If she increases her contribution rate from 3 per cent to 8 per cent, her retirement saving at age 65 will leap from $565,000 to $984,000. That's close to double the amount.
Get the full member tax credit
If you pay $20 a week into KiwiSaver — $1042.86 a year — the Government will put in another $10 a week. That's an immediate return of 50 per cent on your investment.
Tongue says people often fail to maximise their member tax credit. He says if you are self-employed, you should always make sure you pay that amount, even in a lean year.
Likewise, students who plan to one day buy a house should also contribute that much. If you're a stay-at-home spouse, then you should make this contribution as a couple as both of you can claim the credit.
The right Prescribed Investor Rate
The PIR is tax applied to KiwiSaver. The wrong level can cost you money. Rates depend on your income over the past two years. If you underpay, the IRD will ask you to pay the money back later. If you overpay, you are not entitled to get anything back.