Albert Einstein is famously quoted as saying “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t pays it!”


There has been much debate recently about the fees a KiwiSaver member will pay over the lifetime of their investment to age 65. But, investors should focus on what returns they can achieve – after fees – over the duration of their investment.

Just a small amount of extra return, combined with the magic of compounding, will make a substantial difference to your retirement nest egg and hence the quality of your retirement lifestyle.

This is particularly relevant for KiwiSaver members, as the amount you contribute to your KiwiSaver is the same regardless of which type of fund you are in and the fees which you pay. So the only way to get a better outcome at retirement is to be in a fund which has the ability to generate a higher return, after fees, over time.

Take for example a 30 year old who contributes to their KiwiSaver through to age 65. Over the 35 year period they will contribute approx. $82,400* to their KiwiSaver account via their own contributions. They will also receive employer and government contributions. How much this turns into at age 65 is then down to how well their chosen fund does after fees and tax.

The table below shows what this might look like. The difference of just a few percent better returns (after fees and tax) can be significant over time.

The average return of the KiwiSaver Default funds is 6.3% p.a. after fees but before tax over the past 5 years**. The average return of the conservative fund category is 6.6% p.a. over the same period. These funds are lower fee funds and in some cases are not actively managed. The average return of the growth funds is 9.5% p.a. over the past 5 years, after fees and before tax. This is a difference in performance of 2.9% p.a.

Over this same period, the average fee of a KiwiSaver growth fund was 1.15% p.a. and the average fee of a KiwiSaver conservative fund was 0.74% p.a.**. This is a difference of only 0.41% p.a. in fees for 2.9% p.a. better performance between growth and conservative funds. Put another way, the extra performance is about 7.1 times more than the difference in fees.

From the table above the difference in end result between a 6% p.a. return and 10% p.a. is a massive $617,686. More than half a million dollars! That could mean an extra $30,800 of annual income in retirement over 20 years. That would make a significant difference to the quality of anyone’s retirement.

That is what ‘30-somethings’ are potentially leaving behind by investing too conservatively in low risk, passive or low cost KiwiSaver funds over the long term. A 40 year old would be leaving behind approx. $165,000 at age 65 using the same scenario. That’s about $8,200 p.a. less in retirement income. A decent holiday each year!

Fees are important and KiwiSaver members do need to take note of the fees they are paying. However, we would argue that the after fee returns of your KiwiSaver fund are more important. Lower fee funds generally invest in low risk / low return assets or are passively managed, rather than actively seeking to generate the best return for their investors.

KiwiSaver is a long-term investment for most members. It’s too late once you reach 65 to wish you had taken better advantage of the eighth wonder of the world, just to save a few dollars in fees along the way.

Murray Harris

Head of KiwiSaver

*Assumes starting salary of $50,000 with 2.5% wage growth p.a. and Employee contributions at 3%.

^Source: Includes employee, employer & govt. contributions. Investment returns are after fees and tax. Past performance is not a guarantee of future returns.

**Morningstar KiwiSaver Survey, June Quarter 2016.

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Milford Funds Ltd is a KiwiSaver plan provider.