KiwiSaver double whammy hitting retirees and first-home buyers

First-home buyers and retirees with their money sitting in conservative KiwiSaver funds have been hit with a double whammy that has seen the value of their investments dragged down even further than higher risk growth funds.

But experts say the funds remain a good option for those who need access to their money within a three to four year timeframe.

Figures from Morningstar show conservative funds fell 1.4 per cent on average in the year to March 31 compared to the 2.8 per cent average rise in growth funds.

Financial author and former adviser Martin Hawes said the expectation was always that a conservative fund would be low risk but not no risk.

"A conservative fund will be less risky than a balanced fund. It is shares that show generally the most volatility."

"But having said that bonds do show volatility and that is because bonds within a KiwiSaver portfolio are mark-to-market - that is the value of them is assessed every day according to interest rates."

Unfortunately bonds and shares have both fallen in value at the same time resulting in a double whammy for those in conservative funds which typically have around 60 to 80 per cent invested in bonds and cash.

Hawes said that seldom happened.

"You expect them to be negatively correlated as shares fall, usually fixed interest, bonds usually rise. But we are not seeing that at the moment."

Falling bond prices have been driven by rising interest rates as bonds with lower coupon rates are worth less.

But Hawes said now was not the time for retirees to be cashing out and moving all their KiwiSaver money into term deposits.

"We are meant to buy in gloom to sell in boom. But most of us do precisely the opposite.

"If you were selling out right at the moment that would mean you were selling into gloom."

Hawes said the best course was to hang on and use up cash in the bank or term deposit money first.

"I do think retired people should hold the equivalent of one or two years as expenditure which means they can use that, they can draw down on those bank deposits rather than drawing down on the portfolio at the moment."

Financial author Martin Hawes. Photo / Supplied

Financial adviser Liz Koh said those heading towards retirement should build up a cash buffer rather than putting everything into KiwiSaver.

"People make the mistake, as they get close to retirement, of piling everything into KiwiSaver which isn't necessarily the right thing to do. In those last few years before retirement it's about building up some of those cash balances in the bank so you have got that spending money for the first few years of retirement and then leave your KiwiSaver in more of a balanced or even part of it in a growth fund."

She said a couple she met the other day had all their money in KiwiSaver and were just taking money out of KiwiSaver every month to cover their spending and had virtually nothing in that bank.

"If people are in that situation what they should probably do is take higher than normal withdrawals out of KiwiSaver over the next few months just to build up their cash reserves a bit and get back into a more sustainable position. Don't take a big dollop out, spread it out over a few months and build up that cash buffer."

Tom Hartmann, personal finance lead at Sorted, said retirees who were drawing down on their KiwiSaver over time should also remember that the figure they see as the account balance is not what they have but what their investments are worth at a given time.

"That is what they would be worth if they sold them all today. It is a temporary thing that goes up and down.

"And this is hard to remember because when we look at a bank account balance we think that is how much we have. But actually an investment account balance is not how much you have it's what your investments are worth on a given day. And lately they happen to be worth less because that is what is happening in the market. But they are only really worth less if you are selling them all today."

Hartmann said those who moved the money into term deposits or the bank would be crystallising that lower value.

"You are turning what your investments are worth into what you have."

"But if you don't do that and ride the ups and downs in value that are bound to come with this then actually you will find when markets head up that your investments are worth that much more."

Hartmann said it was hard for people to cope with the sense of loss.

"We are hard-wired to have this aversion to loss, it is very much ingrained in us and there are probably good biological reasons for it but they don't serve us well in terms of investment markets."

He said it was only a paper loss.

"For retirees who are drawing down gradually actually this is not that painful - because although they have cracked open their nest egg - most of them are not going to use it all in the next year or so.

"So depending on what the markets do this might be a blip, not a big deal. It is certainly not a loss until you sell the investments in that fund."

What about first home deposits?

Unlike retirees, first home buyers are likely to need to take all or most of their KiwiSaver money out when they buy a first home.

Koh said savers had to choose a fund if they wanted to use KiwiSaver to buy a first home and a conservative fund could be the "lesser of all evils".

"The conservative fund is probably still less volatile than one that has a higher exposure to shares."

Financial adviser Liz Koh. Photo / Supplied

Koh said while their money was potentially going backwards in a conservative fund property prices were also coming down as well.

"It is not necessarily a gloomy situation for those people. If you had falling KiwiSaver funds and rising property prices then that would obviously be disastrous. But we are in a situation where everything is suffering in some way now. There is no one good place to put your money - it is just a case of where can you put it that creates the least loss, as opposed to the maximum gain."

She said one option was to put the money into a defensive or cash fund.

"It just depends on the timeframe in which you will potentially purchase. If it was within the next year or so you might want to go defensive."

Hartmann said those who were about to start shopping for a first home should consider moving their money into a defensive or cash fund.

But he said they needed to look closely at what was in those funds as some also invested in bonds.

"You do have to look closely at the fund you choose as some also have bonds in them - they are not purely a cash fund, they are not like term deposits, so depending on which one you pick which one is right for you, you might still see some volatility."