Compound Interest

Compound interest is what happens when the returns on your savings earn their own returns. If you invest $10,000 at 5% per year, after one year you have $10,500. In year two, you earn 5% on $10,500, not just the original $10,000. That gives you $11,025. The extra $25 may seem small, but over decades this effect becomes very significant.

The key variable is time. Starting to save at age 25 versus 35 can mean hundreds of thousands of dollars more at retirement, even if the monthly contribution is the same. This is why financial advisers consistently emphasise starting early.

Different KiwiSaver fund types offer different expected returns. Conservative funds typically aim for 3 to 4% per year, balanced funds 5 to 6%, and growth funds 7 to 8%. Higher returns come with higher short-term volatility, but over long periods (20+ years), growth-oriented funds have historically delivered stronger results.

Compound growth is the primary driver of retirement wealth. A 30-year-old contributing $200 per month at 5% growth will accumulate roughly $200,000 by age 65. At 7% growth, that same contribution becomes roughly $300,000. Time and return rate are the two most powerful levers.

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