Mary Holm: Ardent saver misses the point

Q. I have read a lot of the articles about KiwiSaver, and I don't like it at all.

Why would you let a bunch of unreliable politicians sublet your money to organisations that use your money to make them a profit, and give you a pittance at a given period?

I would advise people to not even touch KiwiSaver, and rather invest in yourself. By that I mean save a deposit or the total amount for your own residence, and pay it off in cash.

Here is the way to do it. Save 50 per cent of all your money, and use the balance to live with. You have got to be strong here and make sure that your money goes into a savings account. When you get to $5000, invest that in term deposits that roll over into themselves on an ongoing basis.

Do the same thing over and over, even for your own pension. Then your savings will start taking off and your money will permeate to better returns than KiwiSaver can ever do for you.

The more you can save, and get lump sums, invest in other property that compounds by itself, and you wind up with the cash, not the cronies.

KiwiSaver ... what a crock. KiwiSaver makes fortunes for other organisations and virtually nothing comes back to you in the end. Don't get suckered in to it.

A. After reading your letter and the next one, I'm driven to conclude that KiwiSaver is like eating oysters - you love it or you loathe it. In both cases, though - and especially yours - the opinion seems to be based on some misunderstanding.

Firstly, politicians have nothing to do with KiwiSaver - other than passing it into law.

More importantly, you can do something pretty similar to what you are suggesting, but including KiwiSaver, and end up with considerably more money.

Before we go further, let's acknowledge that not many people - strong or not - would save half their income. Sure, many could save more than they think. If they lost their job and the only new one they could find paid considerably less, they wouldn't starve, which proves they could get by on less. But a 50 per cent spending cut is huge.

Anyway, at whatever level a person saves, I would strongly suggest they join KiwiSaver, contributing 2 per cent of their pay if they are an employee and up to $1043 a year if they are not. Government and employer contributions will more than double what they put in. That's where my plan beats yours.

If the person wants to invest in term deposits, as you suggest, some KiwiSaver cash funds invest in those plus other low-risk investments. More on that in the next Q&A.

You're obviously concerned that KiwiSaver providers charge fees. But for everyone over 18 there's no way that those fees will be anywhere near as high as the extra money coming in from the Government and employers.

If the person wants to make further savings, it's usually better to do that outside KiwiSaver. And your suggestion, of saving hard to pay off a house, and perhaps other property, is generally a good one.

One point, though. You seem to be suggesting rolling up money in term deposits until you can repay a mortgage in a lump sum. But as long as your mortgage interest rate is higher than term deposit interest - which is almost always the case - you will pay off a house faster if you put your savings directly into extra mortgage repayments.

Convinced? Somehow I doubt it. It sounds as if you deeply distrust financial institutions - except, for some reason, banks.

The fact is that the risk of losing money in a conservative KiwiSaver fund is probably much lower than the risk of dying in a car crash, and presumably you ride in cars. Still, it's your choice not to come for the KiwiSaver ride.

Q. With respect to your in-depth knowledge of KiwiSaver, I feel that in a recent answer you missed a very important point for the large number of Kiwis who do not understand KiwiSaver or managed funds generally.

They need some very simple advice to encourage them to invest in KiwiSaver without taking any risk whatsoever with their savings. Nobody should be missing out on KiwiSaver tax credits.

Everyone who is still hesitant about KiwiSaver should join a simple KiwiSaver cash fund and add to their account whatever they can afford up to the $1043 per year. The Government will match your savings each year, giving you a return of over 100 per cent.

A cash fund has no more risk than a bank savings account that will earn you 3 per cent per year. So, invest what you can afford and get the equivalent of over 100 per cent interest on your savings.

Many Kiwis don't understand KiwiSaver (it is too complex) and don't want to take any risk with their savings. They should join a KiwiSaver cash fund to have no risk but a return of over 100 per cent. Remember KISS.

P.S. As an aside, I moved our family KiwiSavers (two adults and two children) to KiwiSaver cash funds in 2008 as the financial markets started a meltdown. What a good move that turned out to be. So even though my kids have plenty of years left in KiwiSaver, I was able to save them from losing 20 per cent of their funds by focusing on conserving capital at a time of high risk. I know you argue that investors should not try to time the markets, but sometimes the likelihood of a downturn is overwhelming. Buy and hold is not always the best mantra.

P.P.S. A colleague who is over 60 was advised in early 2008 to stay in her growth fund even though the fund was falling in value and she was anxious not to lose any of her life savings. This advice came from a large company of financial advisers. I was frankly appalled by this advice given her age, her need to conserve capital, the fragility of global financial markets, and that stock markets had previously seen a strong bull run. Sadly she lost quite a lot, even though she didn't feel comfortable with the expert advice. Sometimes you should listen to gut feeling rather than experts.

A. Your very important point is so important that I have made it many times - in my KiwiSaver books and this column. Trouble is, I can't say everything in every KiwiSaver Q&A. It would bore readers, and I already receive complaints that too much of this column is taken up with discussing the scheme.

Still, perhaps it's time to say once again how uncomplicated and low-risk KiwiSaver can be, so thank you.

I'm glad that you said a "simple" KiwiSaver cash fund. As this column has discussed recently, some cash funds invest in somewhat more volatile investments than term deposits. The ultra-conservative investor should choose their fund wisely.

Even so, all KiwiSaver cash funds are slightly riskier than a savings account. The latter is covered by the Government's deposit guarantee scheme but no KiwiSaver funds are. Still, as I said above, KiwiSaver cash funds are pretty safe.

A couple more quibbles:

* You imply that anyone can invest whatever they can afford. But employees have to contribute at least 2 per cent of their pay during the first 12 months - although after that they can take a contributions holiday and then put in whatever they like. If they do that, though, they may miss out on employer contributions.

* Your talk of a 100 per cent return is misleading. True, each year the money you contribute to KiwiSaver is at least doubled by the Government and in some cases your employer, so that money earns at least a 100 per cent return. But all the rest of your KiwiSaver money - which will be the bulk of the account over the years - simply earns whatever the fund's investments earn minus fees.

That's not to say the more-than-doubling of your contributions is not powerful. Twice as much going in means twice as much coming out in retirement, which is a terrific boost.

P.S. Have you moved the kids back to higher risk funds yet? If not, they have already missed some great returns recently. When is the best time to move? Who knows? Sorry, but I worry about anyone who correctly times the market once and then thinks they know what they're doing.

P.P.S. There's nothing expert about the advice your colleague received. At her age and with her attitude to risk, she should never have been in a growth fund regardless of what the market was doing. She should complain formally to the head of the company. If she gets nowhere, I'd be interested to hear about it.

Q. Much to my surprise, I find a photo of my old place in the Hokianga featured in your column recently.

Money brings with it greed, and greed of a few leads to great suffering of many as recent times have shown, with many losing their life savings, homes and families as they are conned with promises into money-making schemes.

In the 1960s and 1970s a seed of change was planted and a new people started populating the planet. These new directions were discriminated against, which was why that photo with your column first appeared in the Herald in the 1970s.

The Hokianga County Council decided to stop this area being repopulated after being emptied out in the 1950s and 1960s by bright promises and sales pitches from the cities. The Hokianga hippie gathering was to stop council's direction to condemn and pull down houses that they deemed were no longer habitable. Luckily we won that battle, and a new influx of like-minded people arrived.

Today the Hokianga hippie economy is thriving, with many great creations being sold in the many galleries, shops and cafes.

Hang on a minute. What's that second verb in your last paragraph?

A. Money certainly can bring with it greed.

But it can also be a useful way of rewarding hippies for their creative work, enabling them to acquire not just what the person who buys their creations has to offer - which would be the only option if we used barter - but what anyone else has to offer.

The quote from the Bible is not, as is commonly said, "money is the root of all evil" but "the love of money is the root of all evil".

Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.