Are you one of the multitude of Kiwis who have no idea how much is in your KiwiSaver account and how well it has, or has not, performed over the past 12 months? If so, then now is the time to get motivated and find out how it is performing. The more your account balance grows, the more important it is to know how it is performing and if it is in the right place.
The Morningstar KiwiSaver survey as at 30 September 2013 identified there was over $16.5 billion sitting in KiwiSaver accounts. In Morningstar’s words, asset allocation (ie: the mix of income and growth assets) is one of the most important decisions to make when saving for retirement. However, the survey reveals a huge percentage of the KiwiSaver money is still sitting in default or conservative funds. This is fine if the investor needs to access the money in the short-term to contribute towards their first home, or to pay for something as part of their retirement expenditure. However, statistically, only a small percentage of the 2.2 million KiwiSaver investors are in a situation where they can or will need to withdraw their investment in the short-term.
Having the money in low risk funds, such as default or conservative funds, may provide peace of mind but the investor runs the risk of seriously underperforming over time. This may result in more money needing to be contributed to KiwiSaver to meet retirement needs, or retirement goals having to be pared back to meet the finite sum invested.
You might ask, why is so much money sitting in these lower risk funds? Unfortunately, there is no single answer. Some of it could be lethargy or ignorance on the part of the investor in they have never bothered to find out where their money is since contributions commenced and they are not aware of the longer term implications of it remaining in those funds. Some may mistakenly believe their default fund investment is government guaranteed and will never fall in value. Unfortunately, there is no government guarantee on any KiwiSaver fund and default funds have the potential to under-perform inflation and even achieve a negative short-term return in extreme situations.
What should one do? We are certainly not advocating investors automatically move their existing default or conservative fund investments to a higher risk fund. However, everyone needs to take a greater interest in their KiwiSaver accounts. We need to meet with clients to discuss the following:
- Can the existing contribution be increased so more money is available when you most need it?
- Are you saving enough to maximise the member tax credit?
- Are you invested with a fund manager who is consistently in the top quartile of performers in the asset class you are investing into, or should be investing into?
- What is your risk profile and when do you realistically believe you need to start accessing your KiwiSaver account?
- What are your other investment assets and how best can your KiwiSaver be integrated into your overall asset base to achieve your returns?
- If you have stopped contributions or only ever contributed a lump sum, then is now the time to commence contributions;
- How can we position your KiwiSaver so you can best take advantage of dollar cost averaging and the power of compounding interest?