KiwiSaver has been an outstanding success with regards to engagement by New Zealanders. It has far exceeded government expectations and with over $25 billion of funds under management, KiwiSaver is now a force to be reckoned with.
However, at the individual investor level, there are some serious concerns around how little notice many New Zealanders are taking of their KiwiSaver accounts and the consequent potential underperformance of their accounts with regards to achieving their financial goals.
Our 7 Steps to KiwiSaver Success has been developed to help our clients maximise the power of KiwiSaver to help achieve their long term financial success.
The comments above are generic in nature and are not intended to be personalised financial advice nor a recommendation or solicitation for any particular KiwiSaver product. Investors are recommended to seek professional financial advice relating to their particular KiwiSaver scheme and their financial situation.
- You need to be in to win: Ensure everyone in the family is enrolled in KiwiSaver. Enrolling in KiwiSaver entitles the investor to a $1,000 government-funded kickstart contribution. Even $1,000 compounds nicely over the long term. This is all free money.
- Contribute at least $1042.86 per annum once 18-years or over: The member tax credit is payable to all those 18-years or over who are contributing to KiwiSaver. You do not have to be employed but you do have to be contributing yourself. The government will pay 50 cents for every dollar of member contribution annually up to a maximum payment of $521.43. Failing to contribute the minimum of $1042, results in the member not obtaining the maximum government contribution. This is akin to not getting a 50% return on the first $1042 pa of money you contribute.
- Get your employer contributing: Employers must contribute a minimum of 3% of your pay unless you are not contributing to KiwiSaver at all, you are under age 18 or over age 65, or your employer is already paying into another eligible registered superannuation scheme. Most employment contracts work on salary plus KiwiSaver so your employer is not going to give you more salary just because you are not contributing to KiwiSaver. By not contributing to KiwiSaver, you are not only missing out on the $521 pa member tax credit but also the 3% or more your employer would otherwise have contributed.
- Select the right fund: Unfortunately, too many KiwiSaver investors are still in the default funds or other low risk funds. Although these funds are safe, they may in fact be doing you a disservice if you are not able to, or do not intend to, use your KiwiSaver funds within the next five years. In a low interest rate environment, these low risk funds can potentially underperform inflation, plus you are not maximising the power of compounding interest. KiwiSaver is a ‘locked in’ savings scheme so there is little benefit in being ultra-conservative with the investment when access to the funds might be decades away. Moving to more growth-orientated funds will potentially increase long-term investment returns but also increase volatility. However, volatility is not necessarily a bad thing if you are saving on a regular basis as when the market prices are down, making regular contributions is akin to buying items at the supermarket on special.
- Select the right manager: Don’t get sucked into regularly changing fund managers to ensure you are with last year’s winner. The problem is that there is no guarantee that last year’s manager will also be the best performer this year or next. It might be free to switch managers, but you can be ‘out of the market’ for some time when this is occurring and this can potentially cost you in lost investment performance. The secret is to move to a manager who consistently performs well (ideally in the top 25% of its peers); has a high quality rating from a reputable research company; has low fees; a solid investment team, and a variety of funds for you to move into as your situation changes.
- Seek advice about a Lifesteps/Lifetimes facility: Avoid looking at KiwiSaver in isolation to your overall investment portfolio and goals. A number of KiwiSaver schemes have tried to be helpful by providing a Lifesteps or Lifetimes option. If this is ticked, then as the member ages, the accumulated balance will automatically be switched into progressively more conservative funds. This sounds fine in theory. However, it assumes that everyone becomes more conservative as they age and that they are likely to want to cash up their KiwiSaver at age 65. The reality is far from this. Many members have or will have alternative investments at retirement age and because KiwiSaver is unlocked at age 65 and it has low fees, the money can remain in KiwiSaver as part of an overall diversified portfolio. If your KiwiSaver investment is not all going to be consumed at retirement age, then there is limited value in going more conservative with regular savings products like KiwiSaver until closer to when you wish to access the money. The Lifesteps/Lifetimes facility also reduces the power of compounding interest. Just when you have the largest accumulated balance in your KiwiSaver funds, you are being automatically moved to a more conservative fund where the earning rate is potentially lower. However, the overall concept of not having all your money in highly volatile funds just when you want to spend it should always be remembered. The secret is to build KiwiSaver into your overall retirement investment portfolio. That way you can have an overall portfolio risk profile, and then have the KiwiSaver portion of that portfolio performing to its maximum capacity within the portfolio. Advice is needed to structure this.
- Keep your eyes fully open: It is too easy to ‘set and forget’ your KiwiSaver scheme. KiwiSaver managers and their funds will naturally change over time and the scheme you initially joined may not necessarily be the scheme most appropriate for you today. All may not be what it seems with some schemes and funds. Some of the high performing funds may be taking risks and have asset allocations which do not sit comfortably with your risk profile, but this will not be evident until something goes wrong. Other managers may have undergone significant change and their performance has reduced - naturally these managers are not going to come and tell you they are now underperforming and there are better funds elsewhere. Others may have high scheme fees relative to better performing peers: high fees directly erode fund performance and ultimate fund value. The secret is to have access to professional advice and research so you can have your risk profile regularly updated and then link your KiwiSaver to your other retirement savings, and use the best products in the best way at the right time to give you the desired outcome when you need it.
A disclosure statement is available upon request and free of charge.