Fancy an extra $500,000? Who wouldn't, right?
Thousands of New Zealanders will have the chance to earn that – or an otherwise significant amount – from December 1. However, few of the 381,000 Kiwis involved are likely to know anything about the opportunity.
That's the feeling of KiwiSaver advisors BetterSaver, whose CEO, Joe Taylor, says a simple adjustment to KiwiSaver funds could earn some couples as much as $500,000 by retirement age of 65.
The 381,000 are New Zealanders who have never managed their KiwiSaver account. Put into a default fund when they began their KiwiSaver journey, they've not done a single thing since.
December 1 is when the government-mandated change to default KiwiSaver funds occur. Unless the KiwiSaver members involved make a decision to do otherwise, all default funds (which currently sit in the most conservative investment setting) will shift to a balanced fund.
That's good news, surely, as the government claims that those who join the scheme at 18 could be about $150,000 better off at retirement after December 1.
Well, yes, says Taylor – but what about $500,000? That's the sum BetterSaver, an advisory group who give investors personalised KiwiSaver recommendations, believes a couple could accrue if they take advantage of the December 1 change.
This fictional couple – let's call them Adam and Anne – are both in their 30s. They already have a KiwiSaver balance of about the national average - $26,410. They have a household income of $110,000 (just under the national average of $113,000).
"If they move their money out of a balanced fund into a growth fund, they potentially stand to have more than $500,000 more when they reach retirement age," says Taylor. "We have worked that out using the projections for a balanced fund versus the projections for a growth fund, calculated on the publicly available calculate.co.nz Kiwisaver Calculator.
"That's serious money – it would make a huge difference to lifestyle in retirement," he says. "It would mean Adam and Anne would be much more active members of society – and that would mean more money would be circulating, which is good for the economy and things like job creation."
The key to Adam and Anne's enhanced fortunes is the selection of the right KiwiSaver fund. Investment history shows that a growth fund, with investments of higher risk profiles, is subject to more short-term volatility in the market. However, Taylor says growth fund results are usually much ahead of the conservative and balanced funds over longer time frames.
"You saw that last year when Covid-19 first struck – and thousands of people decided to shift their funds to a more conservative fund to cut their losses. There was a quick rebound – and those people lost a lot of money they would otherwise have accrued if they'd stayed with their growth funds.
"If you look at the 10-year average of a conservative fund, it works out to about 5.5 per cent. A growth fund comes in at 9.9 per cent, almost double. A balanced fund comes in somewhere in between, probably around 7 per cent."
So, says Taylor, while the shift from a conservative default fund to a balanced fund on December 1 is good, it could be better for many people – and all they have to do is make a decision by November 30.
"A balanced fund isn't for everyone. In many ways, it is the investment equivalent of sitting on the fence or no man's land. It's been proven many times that the type of investment in growth funds wins out big time over the long-term.
"That said, if a KiwiSaver member needs their money in 2-3 years – maybe to buy a first home – they will not want to be in a scheme that is volatile…and balanced funds still have a bit of volatility. Or, if a couple is saving for retirement, they will do a lot better over the long term – as we have demonstrated – if they decide on a growth fund.
"That's what we do – we are on a mission to help educate people, to help them make decisions that are right for them. So we look at factors like returns, fees, volatility, lining up the right funds for the right stage of life and savings goals, as well as ethical investing preferences," he says. "The right decision for you is the one you make yourself, or with an advisor, to help you reach your goals."
Unfortunately too many Kiwis are still not financially literate or not involved enough with the management of their Kiwisaver. There are over 3 million people in KiwiSaver now, so the 381,000 untended default funds are about 10 per cent of the total pool, far too high a level, Taylor says.
"One of the reasons for the wealth gap between us and Australia, for example, is they have had their equivalent of KiwiSaver a lot longer – and the money that flows into and out of that greatly helps their economy.
"In New Zealand, KiwiSaver is now heading for $90bn in funds. They are projecting it to reach $250bn in 2030 – and that will be when that significant amount of money will be able to be used for big pieces of infrastructure that New Zealand really needs."
So helping people to realise more money for their retirement will also benefit the national economy – but the 381,000 Kiwis have to play a more active role in their money management.
For more information: bettersaver.co.nz