NZ Herald 8 July 2017

This article was published on 8 July 2017. Some information may be out of date.

This week we follow up on last week’s column about a survey on how readers have done in KiwiSaver.

Many of the respondents made comments about the scheme, so we’ll look into some of those this week.

To sum up the survey’s results, most respondents have at least doubled the money they put in — because of government and employer contributions and investment returns. Some have tripled or close to quadrupled their money. Only one particularly unlucky person reported their balance was less than the amount they had put in.

The average annual returns employees have made on their contributions range from 12.4 per cent in conservative funds to 18.3 per cent in riskier aggressive funds. Returns are a bit lower for non-employees, who don’t receive employer contributions.

These returns are in a way “artificial”. The investment returns made by the fund managers were much lower, but they were boosted by the government and employer inputs. Still, they are valid when comparing returns on KiwiSaver with returns on other investments where you don’t get those extra inputs.

TYPE OF FUND

The vast majority of respondents were in KiwiSaver for five years or more, with many joining during the first year of KiwiSaver, nine to ten years ago.

It was not surprising, therefore, to see a strong tendency for accounts in higher-risk funds to perform better. This usually happens over long periods — although certainly not always over a few years or less.

Two respondents sent in interesting data on this. One self-employed woman, a member since 2007, has always split her contributions 50:50 between the lowest-risk cash fund and a somewhat-riskier conservative fund. Her cash balance is $9739 while the conservative balance is $11,189.

And an employee in the scheme since 2010 similarly split his contributions 50:50. His conservative fund balance is $27,241 while his balanced fund balance is $30,477.

STAYING RISKY

Three respondents reported — almost guiltily — on being in risky KiwiSaver funds despite being no longer young:

• “Before you say it, yes I still have 100 per cent growth funds at 65. I’m still working and even if I retired now, it’d be five years before I needed my KiwiSaver money. And I also have a mixture of other investments still growing, so I can afford the volatility with growth share-based funds for a while longer.”
• “We transferred our KiwiSaver funds from a balanced fund to a growth fund in 2013, when I retired, a total of $115000. I know this is a no-no and against the advice of most, but our rationale was that we were ok financially, money diversified in term deposits, share funds, savings etc, so KiwiSaver was like a bonus. Our KiwiSaver funds are now worth $168,000. We have resisted the temptation to put more in, let’s not be greedy and take too many risks.”
• “When I joined I was 64. Even though sage advisers such as yourself suggested that I should invest in a balanced fund at most, I decided to chance my arm in 100 per cent shares. So far the results have been superb. If the worst comes and I lose half of it I am still better off than being in a conservative fund.”

I’ve never said retired people should always avoid risky investments. They’re fine, as long as you’re not planning to spend the money within a few years, or you could cope if your balance plunged.

The third person’s story, though, is a little worrying. He took a risk and it’s paid off. But it’s not clear whether he would have managed well if it hadn’t.

Here’s a similar story from another respondent at a different life stage:

“I have done very well out of KiwiSaver (doubled what I put in), and a part of that has been from reading your many columns over the years, which have had great information about the good, the bad and the ugly of KiwiSaver. But I haven’t always listened, such as keeping my money in aggressive and growth funds right up until withdrawal for a first home deposit (which worked out in my favour thankfully). Hahaha.”

Lucky you! Don’t count on it always working out that way.

Then there are those who have done the opposite — staying too low-risk. Says a woman who moved recently from a conservative to a balanced fund, and whose balance is close to three times what she has put in:

“Not a bad return for my contributions! I am 31 so would like to see it grow a lot more though. I just have not been brave enough to go for a growth fund.”

I encourage you to raise your risk. Do remember, though, that in a growth or aggressive fund your balance might halve some years. You must be prepared not to bail out if that happens.

THE SWITCHERS

Quite a number of other respondents have also switched from one risk level to another. I hope they made the switch for a good reason. Not everyone does:

“I can confess to ignoring your advice and chickening out of the growth fund after patiently watching the more conservative funds maintain positive progress for too long during the global financial crisis. Shortly after losing my nerve, the growth fund was off again, and I was back in with a grin.”

Oh dear. You will have moved out at a low point, and then missed out on at least some of the upturn. Heaps of research shows that jumping in and out slashes returns. Please promise to stay in the growth fund for the long haul, or get out now and stay out.

“In July 2016 I changed my KiwiSaver investment to 80 per cent balanced and 20 per cent high growth. I was feeling brave after reading your column!”

That’s better thinking — assuming you don’t expect to spend the growth fund money for at least a decade, and that you have stickability. Moving just 20 per cent is a nice gradual way to make the change. Maybe you’ll add more later.

VOLATILITY

One lucky respondent’s KiwiSaver account is worth 3.78 times what he has put in — one of the highest multiples. He switched to a growth fund in 2010, and reports:

“If I’d known then what I know now, I would have made more voluntary contributions and invested more in the growth fund.”

Great, but don’t get carried away. The period since 2010 has been especially good for growth funds. But the markets will inevitably fall at some point.

The following reader understands volatility:

“Probably after a year I began doing my own mix with a growth strategy in mind. You’ll see the interesting volatility in my spreadsheet which may be of interest to readers and proves that past returns are no indicator of future returns ie negative 18.35 per cent in year one, and positive 24.10 per cent in year two!”

Wow! Big swings. Here’s someone else who also knows not to react to short-term ups and downs:

“Overall I am not that satisfied with my fund’s performance, but I have chosen not to change just based on last year’s performance figures. I do find it hard to find an objective site that does overall comparisons over time between different funds with the same investment settings.”

The KiwiSaver Fund Finder on www.sorted.org.nz gives longer-term comparisons.

“I’m really focused on the performance of my portfolio. I get the unit updates each day. Whenever the unit value drops, like Brexit and the China issue in early 2016, I throw a voluntary payment in. The unit value always comes back.”

Generally I don’t recommend watching performance that closely. Once every few months is often enough, because many people panic unnecessarily when their balance falls and may reduce their risk at just the wrong time. Still, brave people like you, who buy when prices are low, can do well out of it.

CHILDREN IN KIWISAVER

Comments from readers:

• “Got my 20-year-old daughter into KS at the age of 14, and she’s delighted with how the balance keeps growing.”
• “Reading your Herald column got me into KiwiSaver — and then I got my teenage children signed up. After years of them giving me a hard time about it, they now realise the benefit.”

• “My next job is to convince my 20-year-old nephew, who’s an apprentice builder (treated as a contractor — so no employer contributions) to join. He’s convinced the money will be gone by the time he’s retired, and I can’t seem to get him to understand it’s HIS money!”

It might be easier to persuade him to save in KiwiSaver for a first home. That’s not such a long way away.

• “I got my niece enrolled in KiwiSaver when she was a year old, and I contribute $10 a week to it, plus her parents’ contributions and birthday money. She has a chart in her room (hand-made) showing how much she has in her KiwiSaver, and how much she will need for her university education (at present being Moana and sailing). She is very excited and plans to make contributions herself once she is old enough for a job.”

The chart is a great idea. It seems, though, that you think KiwiSaver money can be used for tertiary study. It can’t. Maybe start saving elsewhere for her university, and leave the KiwiSaver account to grow for her first home.

• “I enrolled in KiwiSaver early on, then enrolled my kids with $50 each when the $1000 kickstart was still happening (against my partner’s ‘better’ judgement!). I think this proves how good his judgement was! (The balance in each account is now $1452). I’m probably being too conservative with the kids — might do a trial with the youngest one at 100 per cent growth this year and see how it compares with his sister, though of course that will only be a reflection of that particular year. It’ll be interesting.”

You’re quite right not to put any weight on fund performance differences over a single year.

Not everyone is happy with how their children have done in KiwiSaver. We’ll look at a reader’s letter about this in next week’s column.

TO SUM UP

KiwiSaver has worked well for many people. Says one:

“My wife and I know that if it weren’t for KiwiSaver, much of our contributions would not have ended up in those schemes. The employer and Government contributions make a big difference and particularly for my wife, the fact the money is gone before she gets paid is fantastic.”

I suspect that’s common. KiwiSaver contributions are out of sight and out of mind, but the money will be very real when it comes to buying a first home or funding retirement.

My big worry, though, is that people will expect the strong performance of recent years to continue. It won’t. There will be market downturns — in both the bond and share markets — and probably some crashes in the years to come. But still, those who keep contributing regardless are sure to end up doing well.

Many survey respondents made kind comments about this column. I really appreciate that. One example:

“I’m an avid reader of your column — and since this seems to be a way to say ‘thank you’ for all your wonderful advice, here is my KiwiSaver information for your research.”

A big “thanks” back to you and all the others who contributed.

Next week we’ll get back to the normal Q&A format — including questions about KiwiSaver but also other topics.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and 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 [email protected] or click here. 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.