A savvy shift in KiwiSaver can earn Kiwis big bucks.
August is Money Month – the ideal time to take stock of important investments like KiwiSaver.
Zoe Robson wishes she could go back in time and talk to her lockdown self – and tell her not to squander $3000.
She’s talking about her KiwiSaver account and the time, during the 2020 lockdown, when thousands of startled Kiwis saw their balances diminishing during the financial markets’ downturn. Many swapped their money from higher risk growth funds to more conservative funds – costing themselves thousands of dollars because the higher-risk funds recovered faster, making up the previous shortfall.
Robson is 28, an advertising account manager* and, unlike many in her age bracket, is a keen observer of her KiwiSaver fund’s progress. Which was why, when most KiwiSaver accounts lost value during lockdown, she acted fast to try to prevent her money from falling further.
“it’s $3000 I will never get back,” she says. “My mistake was that I didn’t want to lose more money – but what I also did was ensure that I lost the opportunity to regain the money I’d already lost.”
Since then, Robson has kept a close eye on her KiwiSaver account. She assessed her tolerance for risk and her investment goals, and she ended up changing her fund choice and provider.
Liam Robertson, a financial adviser for Milford, says Zoe’s experience is the kind of self-examination people should undertake during Money Month. “It’s a good idea to review all your finances once a year, whether that’s insurances, power or internet providers – to make sure you are getting the best deal, especially in something as important as KiwiSaver.”
About 10,000 KiwiSaver members change their provider each month, according to Inland Revenue. Anecdotally, Robertson says most of those changes are to funds with a higher risk profile and which carry the prospect of achieving higher long-term returns than their existing fund.
He often uses an example from Sorted’s KiwiSaver calculator showing an example of a 35-year-old person on a $55,000 annual salary, with an existing KiwiSaver balance of $20,000, paying three per cent (matching the employer’s contribution) into a conservative fund. At retirement, that person after fees and taxes, may well have around $154,000 (in today’s dollars i.e. after the effects of inflation).
But if that same person paid that same three per cent into a (more aggressive) growth fund, for example, their balance at retirement age could be around $216,000 – (in today’s dollars) or about 40% more.
Concerningly there are about 300,000 New Zealanders – about 10 per cent of all those in KiwiSaver – who have never made any kind of adjustment to the default fund they were originally placed in. “They have probably never made an active decision,” says Robertson, “which is a worry because KiwiSaver is the most important investment many people will make over their lives, alongside a house.”
The other decision that can be made to maximise KiwiSaver returns is around contributions. Most people are hesitant about putting in more than the employer’s three per cent, which Robertson understands with issues like the cost-of-living squeeze.
“But increasing contributions can make a huge difference,” he says. “If you look round the world, conventional thinking now is that something like 10-15 per cent of your salary needs to be saved if people are to have the sort of retirement they picture. Australian workers get 11 per cent from employers in their scheme, soon to rise to 12 per cent.
“That’s my main message – Money Month is a good opportunity to take stock; use retirement calculators – Sorted has a good one – and look at the projections for your retirement. I’d say most Kiwis who do will find they are falling short of what they expect they’ll need.”
Robertson also cites another example from Sorted’s KiwiSaver calculator of that same person earning $55,000 p.a., this time in a balanced fund with a $20,000 balance. In that fund, contributing three per cent, that person could end up with around $182,000 (in today’s dollars) at retirement age.
But if 10 per cent of the salary was paid in, that figure could rise to around $356,000 (in today’s dollars) by retirement age. “You don’t even have to do it in KiwiSaver,” Robertson says. “There are investment funds. They are not eligible for employer or government contributions, but apart from that they are very similar to a KiwiSaver Fund– except should you need the money, it is available before age 65.”
That is exactly what Zoe Robson has done – and she says she is not touching either her KiwiSaver or the investment fund before retirement.
“I I wish I knew then, what I know now,” she says “Once I did some research and considered my provider and fund choice I felt more comfortable. I also, saw independent studies showing Milford was a really strong performer and so I switched to Milford.
“I’ll be forever grateful for KiwiSaver – it allowed my partner and I to buy our first house. It was our main source of savings as our families weren’t in a position to help us and it allowed us to access the Kainga Ora Homestart grant which gave us $10,000 each for our new build - an enormous leg up that you can only access if you have a KiwiSaver account.
“Now, I’m in a more aggressive fund and, though the dips can be really scary, it should lead to a positive picture over time.
Liam Robertson’s KiwiSaver tips for Money Month:
- Define your goal and commit to it. Are you investing for a first home or retirement? If you think you need at least $100,000 for a house deposit over the next 10 years, you need to plan how much you’ll need to contribute to get there. Same with retirement.
- Define your timeframe. Generally speaking, if retirement is the goal, you have a longer investment horizon and the more risk you can consider taking on (because you have time to recover from the ups and downs of markets).
- Define your risk tolerance. Think about how comfortable you are with market volatility, which can see your balance go up and down as markets go through cycles. If you’re going to lose sleep over that, a growth fund probably isn’t right for you.
If you can invest in a fund which complements all three of these factors, you’ll likely be a more comfortable, happier investor who can tolerate times of volatility.
*Zoe Robson works for an advertising agency where Milford is a client.
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This article does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Past performance is not a reliable indicator of future performance. Investment involves risk and returns can be negative as well as positive. Milford Funds Limited is the issuer of the Milford KiwiSaver Plan and Milford Investment Funds. Please read the relevant Milford Product Disclosure Statement at milfordasset.com. Before investing you may wish to seek financial advice. For more information about our financial advice services please visit milfordasset.com/getting-advice.
