Many people have too little life insurance, but others have more than they need. Photo / 123RF
OPINION:
Q: My wife and I are in our 50s, and we both joined KiwiSaver when it first started. We now have about $130,000 each in the scheme.
As we get older, our life insurance premiums keep rising. I am considering reducing our cover by $130,000 to reduce the premiums. That way, if either of us passes on, the surviving spouse would still get the cash that we expected when we first took out the insurance policy.
Do you see any negatives in this? We expect our life insurance premiums to keep rising as we get older. Hopefully, the same will apply to our KiwiSaver balances and we can use the security of KiwiSaver to offset the premiums.
Our current life insurance cover will pay off our mortgage if one of us passes on. We also have $300,000 invested in managed funds, and have no dependants.
A: There's a life insurance imbalance in New Zealand.
The experts say too many people — often younger — don't have life and disability insurance who really need it. When someone with dependants dies, the last thing their family needs is money worries as well as grief.
But it's common to hear about people with more of this insurance than they need as they get older. You two sit firmly in that group.
The question to ask is: if I die today, will my partner and any dependants manage financially? Your KiwiSaver balances should be available fairly quickly, and the managed funds should take care of expenses in the meantime.
So your plan looks good. And in future, not only will your KiwiSaver balances probably grow but your mortgage balance will reduce. You can review your situation regularly, reducing your insurance cover as you go.
Q: Having read your last column, I found the first question's data not matching Morningstar Kiwisaver quarterly reports.
Morningstar performance figures are after fees, pretax, which may explain the differences. But I agree with the writer that ANZ is better than ASB on their KiwiSaver growth fund by at least 1 per cent.
As of March 31 2022, Morningstar says:
• ANZ Kiwisaver Growth: Total fees 1.05 per cent, growth assets 84.6 per cent, three-year returns 9.8 per cent, five-year 9.3 per cent, 10-year 10.9 per cent.
• ASB Kiwisaver Growth: Total fees 0.70 per cent, growth assets 82.9 per cent, three-year returns 7.6 per cent, five-year 8.3 per cent, 10-year 9.8 per cent.
These funds have a similar amount in growth assets, so one can compare them.
I know you are fond of saying lower fees is always the best fund in each category, but Morningstar's data doesn't back your thinking. In this example, ANZ's active management approach consistently adds extra value long term. Check out Milford Active Growth fund.
Milford have high fees of 2.0 per cent and 10-year returns of 13.4 per cent.
My thinking is that low fees are not always the number one factor. Actively managed funds are more expensive to run than index-based funds. If an actively managed fund is well managed, extra value can be added long term.
The most important consideration in choosing a fund provider is a well run fund with credibility and good returns after fees long term.
Disclosure — last November I changed from ASB growth to ANZ growth.
A: I have no argument with your final point, that high returns after fees are what matter. The trouble is, we have no way of knowing which fund will produce the highest returns in future.
The difference between last week's data from Smart Investor and your Morningstar numbers is probably because the periods and fee inclusions are different. Let's not worry about that. Both sources show:
• The ANZ Growth Fund has performed better than the ASB Growth Fund over the last 10 years.
• The ASB Growth Fund charges lower fees.
Despite what you say, I have never said lower-fee funds always perform best in each category. Of course they don't! In any period, a few high-fee actively managed funds will probably be the stars.
But will they keep shining? A fund's past good performance almost certainly contains an element of luck. Even if the fund managers are particularly good at choosing investments, how do you know they haven't been hired away by another provider? The stars suddenly fall from the sky.
Meanwhile, the low-fee index funds chug away, with average performances because they are following market indexes. And because their fees are lower, they do better than average after fees. Long-term, they're a better bet. I stick with low-fee index funds, and have done, happily, since the 1970s.
By the way, did you read at the end of last week's Q&A the quote from none other than your source: Morningstar? In a nutshell, they say don't choose by returns, but by low fees.
Q: I found this American PBS (Public Broadcasting Service) documentary, The Retirement Gamble, very informative. See tinyurl.com/RetGamble
One of the points made was that a 2 per cent mutual fund management fee paid over 50 years will reduce the value of the portfolio by about one third because of the compounding effect. Therefore an indexed mutual fund with a 1 per cent management fee is a no-brainer.
It was remarkable how little the actively managed mutual fund companies had to say to counter this point — other than that their funds will be the shining stars that significantly outperform the market indexes.
I assume there is no difference between American maths and Kiwi maths on this.
A: You remembered it wrongly. The investment won't be reduced by about one third, but by almost two-thirds!
Thanks for telling me about this documentary. It originally aired in 2013, but that doesn't matter. The main points will always apply.
The doco is about mutual funds, which are much the same as KiwiSaver and non-KiwiSaver managed funds. And they talk about 401k plans, which are basically the same as KiwiSaver.
The example you refer to is of lump sum savings over 50 years earning a net 7 per cent return. Let's say you start with $100,000. If there were no fees, at the end it would total almost $3 million. But if a 2 per cent fee reduces the return to 5 per cent, the total would be about $1.15 million. Gulp.
It might be fairer to look at a regular savings plan of, say, $400 a month over 50 years. At 7 per cent it would total nearly $2.192 million. At 5 per cent it would total nearly $1.072 million, which is still less than half.
Let's apply this to the difference between ANZ's 1.05 per cent fee and ASB's 0.70 per cent fee in the above Q&A.
If the two funds have the same average return of, say, 6 per cent before fees, and total contributions are $400 a month, after 50 years in ANZ you would have $1.054 million. In ASB you would have $1.189 million — or $136,000 more to play with in retirement.
Different online calculators will give slightly different results, because of assumptions about compounding. And I haven't allowed for rising contributions over time. Regardless, the basic message is: over long periods, higher fees make a big difference.
The PBS documentary looks at the data over different time periods, in bull (rising) and bear (falling) markets, and concludes that low-fee index funds work better than higher-fee actively managed funds. The previous correspondent might want to check it out.
Q: Yes, the big banks are Australian-owned, but don't forget their workers who are local and provide for their families.
A: You're referring to a Q&A last week about whether New Zealanders should move from our Big Four banks — the Aussie-owned ANZ, ASB, BNZ and Westpac — to locally owned banks.
You're correct, of course, that while a chunk of the big banks' profits go offshore, the jobs are local. But if lots of Kiwis moved their banking to NZ-owned banks, probably as many jobs would open up there as would close down in the big banks.
While people might not want to change jobs, it can be a good opportunity to learn new skills or gain a promotion. And it's easier to ask for a pay rise when you shift jobs.
Q: I am extremely concerned that you appear to support insurance of bank deposits.
Ample evidence shows that this does not work. Every way you look at it is bad, from depositors having no incentive to be cautious — and then going for more risky investments and costing money needlessly — to the charges to support such a scheme, which inevitably fall on the more prudent managers.
Of course if it is guaranteed by government, then the cost of these failings comes back to the same place as all the other failed schemes of government — the people, via taxes or whatever name they like to put on it. The same thing has been tried in the USA many times, with always the same result, hundreds of billions of dollars lost and no way out.
A: I'm not an expert in this, so I turned to someone who is. Geof Mortlock, formerly of the Reserve Bank, is an international financial consultant who does work for the International Monetary Fund, the World Bank and others.
"The establishment of deposit insurance in New Zealand is well overdue," says Mortlock.
"New Zealand is the only advanced economy, and one of only two OECD economies, without a deposit insurance scheme.
"Its absence has been one of the substantial deficiencies in our financial stability framework. The government's initiative to introduce a deposit insurance scheme is therefore a welcome development."
He doesn't share your concerns. The scheme "will be funded by regular levies on banks and deposit-takers. If, in a bank/deposit-taker failure situation, the deposit insurance scheme has insufficient funds, there will be scope for supplementary funding from the government, but with the scope for this to be repaid through recoveries from the assets of the failed financial institution and, if necessary, ex post levies on banks/deposit-takers.
"Depositors with large amounts of deposits will still have strong incentives to take care where they invest their money.
"The deposit insurance scheme will not be paid for by the taxpayer, but by banks (and implicitly by bank customers). If further incentives are needed for higher-risk banks/deposit-takers to manage their risks prudently, this can be done through a combination of prudential regulation by the Reserve Bank and risk-based levies for the deposit insurance scheme."
In other words, riskier institutions would pay more.
Mortlock adds, "The existence of a robust and credible deposit insurance scheme helps to promote depositors' confidence that their funds are protected in the (relatively rare) event of a bank or non-bank deposit-taker failure. It therefore reduces the risk of pre-emptive depositor runs on banks and other deposit-takers in periods of financial system fragility.
"In a bank/deposit-taker failure, deposit insurance plays an important role in the resolution process by providing depositors with prompt access to their deposits, either by payout or by funding the transfer of protected deposit accounts to another bank/deposit-taker."
What's more, he says, "The existence of a deposit protection scheme also helps to reduce the temptation of politicians to undertake a costly taxpayer-funded bailout of a failing bank; it makes it easier to apply a so-called 'bail-in' of larger creditors (and therefore reduces the risk to the taxpayer)."
The proposed scheme "provides protection for depositors for up to $100,000 (on an aggregated deposit basis) per depositor per bank/deposit-taker." You will be protected as long as all your deposits at one bank total $100,000 or less.
The scheme is expected to start by early 2024. It makes sense to me.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
'Debt becomes more like a rent payment that people get so used to paying.'