KiwiSaver Q&A: mortgage repayment versus retirement savings. Will I be better off paying down the mortgage before helping my kids financially?

Will I be better off paying down the mortgage before helping my kids financially? Is it possible to go into the red with fees and expenses?

Thanks for your question. It's one that many people struggle with and is the subject of great debate among financial advisers as well.

I can't tell you what to do only hit upon the arguments for and against.

I would suggest, as a young family you need to weigh up the decision to invest in your children's retirement savings accounts against your ability now to make ends meet.  These are uncertain times and any debt you are carrying now, including a mortgage, should probably take priority over your kid's retirement savings account.  That said, in the absence of dramatic economic changes in New Zealand and worldwide, anything you can do to make your children's financial futures easier will probably be hugely appreciated (one hopes) by them.

Whether you would be in a better position to help your children financially after having paid off the mortgage depends on a few things. One of them is having the discipline and also ability to do so. It is a point that many financial advisers (at least those who support the KiwiSaver for kids idea) are at pains to make with clients.

Optimistically, we imagine we'll have an abundance of money to go on exotic holidays, renovate the kitchen, buy new cars or help put the kids into their own home once the mortgage is paid.  In reality, unexpected expenses or unplanned life events have a way of throwing those lofty ambitions off course. Despite the best of intentions, it could be that you might not be in the luxurious position of being able to help the kids in 15 or 20 years time, or whenever you pay off the mortgage. (Click here for sorted.org.nz's mortgage repayment calculator). In those intervening years, you'll have missed out on 20 years of compounding interest in your kids account, or at the very least the $1,000 free kick-start from Government.

As for whether fees and expenses could leave you in the red,  it is true they're costly, although most providers swear they aren't and suggest its a marginal business prospect for them. Out of interest, I used the sorted.org.nz's KiwiSaver fee calculator to see how much fees would be overtime if you started one of your kids off at age 10 and made contributions of $1,000 a year. This didn't include the usual benefits, like tax credits and employer contributions. In a low-to-medium risk passive fund, it showed total fees of between $42,000 and $53,000 by the time your offspring's KiwiSaver fund mature at age 65. As a percentage of the fund's value, that's represents 11-23%.

You can experiment with the numbers with our retirement calculator as well, although it's predicated on employee and employer contributions. Regardless, it'll give you a fair idea of how much fees will cost you.

Unless the KiwiSaver fund you choose is allowed to borrow (and a few are) it is impossible for the fund to go into the red (barring fraud of course). Even in the case of a fund that can borrow to fund its investments, you will not be liable for losses.  As almost all fees are charged on a percentage of balance basis, if the fund performs that badly your fees will reduce.  The exception is the fixed administration fee that almost all funds charge of about $2 to $3 per month.  If the fund you choose does that badly then charging this will take your balance into the red then you will have been extremely unlucky.

As an alternative to KiwiSaver, you could make regular contributions into a high-interest savings account and then let your child decide (when they're working age) whether KiwiSaver is for them. (Click here for sorted.org.nz's regular savings calculator) The risk of waiting is that you could miss out on the $1,000 kick-start, although there's nothing stopping you from collecting that now, while it's still available, and then banking their savings somewhere else with cheaper fees. Fund managers would probably argue against doing this on the basis that your long-term returns would be higher invested in the stock market. It should be noted this assertion is increasingly under attack. (Click here to read more on the "Biggest Urban Legend in Finance.")

At the end of the day it is a personal decision and one that needs to be factored into your global circumstances.