Starting KiwiSaver early for children can leverage compounding growth to build a substantial nest egg, with experts highlighting the benefits of time and consistent contributions.
The concept of investing for children often raises questions, particularly around KiwiSaver. While political proposals for automatic enrolment at birth, coupled with government kickstarts, are gaining traction, parents do not need to wait for legislative changes to begin building a financial foundation for their children.
The power of time and compounding
The most significant advantage children have in investing is time. The principle of compounding growth allows even small, consistent contributions to grow into substantial amounts over decades. According to RNZ, an investment of $50 a month from birth, achieving a 5 percent annual return, could accumulate to approximately $30,000 by age 25. Increasing that contribution to $100 a month could see the balance nearing $60,000, while a $500 monthly investment could reach nearly $300,000 over the same period.
Dean Anderson, founder of Kernel, noted to RNZ that investing teaches a powerful lesson about compounding, demonstrating how small, regular investments can lead to significant growth over time. He advocates for starting small to achieve a big impact.
Choosing the right fund
Given the long investment horizon, children's KiwiSaver accounts can typically accommodate a higher level of risk. This often translates to selecting growth-oriented funds with a higher exposure to the share market. Such funds carry higher expected returns over the long term, and with decades to invest, any short-term market fluctuations are less impactful.
Anderson advised that parents do not need to delay, emphasising that creating a kids' investing account today and making small, regular investments can be highly effective. He also suggested that family members could contribute to these accounts on special occasions, fostering a collective approach to financial growth.
Guy Sloan, business transformation lead at Fisher Funds, reinforced the importance of simply getting started. He highlighted that the initial step, even if imperfect, establishes a crucial habit of saving with a clear purpose, adding gravity to the long-term impact of consistent contributions.
KiwiSaver vs. other investment options
The removal of the $1000 government kickstart incentive a decade ago led to a halving of children under 17 in KiwiSaver, according to RNZ, prompting some parents to explore alternative savings vehicles. However, KiwiSaver still offers distinct benefits, even with its locked-in nature.
Sloan explained that KiwiSaver provides a clear framework for long-term saving, often linked to a first home purchase or retirement, which can be a powerful motivator. The scheme's simplicity can facilitate consistent saving habits and offer an opportunity to involve children in their financial journey as they grow older, making investing concepts more tangible than a future, distant event.
Political proposals and future considerations
Both the National Party and NZ First have proposed schemes to automatically enrol babies in KiwiSaver at birth, with initial contributions of $1500 and $1000 respectively. While these proposals aim to boost national savings and address economic inequality, their implementation and ongoing support mechanisms are still subject to political debate.
Economic inequality researcher Max Rashbrooke suggested that government initiatives could go further by matching parental contributions up to a small amount or providing annual contributions for children from low-income families. Such measures, he argued, could significantly encourage savings and ensure accounts grow to a meaningful level by the time children reach adulthood.
This article is for general information only and is not personalised financial advice. Seek advice from a licensed financial adviser (registered on the FSPR) for guidance specific to your situation.