In this article I want to share the wisdom around why to invest into KiwiSaver, how much you should invest, and what you should be looking out for in a provider in order to make the right decision as to who you will invest with.
KiwiSaver is a voluntary, workplace-based savings scheme in New Zealand that was introduced in 2007 as a way to help New Zealanders save for their retirement. It is a government-supported initiative that is designed to be easy for people to join and contribute to, and it offers a number of benefits to those who participate.
When I speak to clients about KiwiSaver, I often refer to it as the biggest ‘no-brainer’ on the planet!…
Think about it…
If you’re employed, it’s the only investment you can make whereby you immediately double your money. You put in 3% for example, and your employer has to match it dollar for dollar. Not only that, but the government kicks in up to $521.43 per year ‘for free’ on top as well. These are known as ‘Member Tax Credits’ (MTC).
What other investment do you know that doubles your money immediately? I can’t think of any…
So, when I say “no-brainer” – It’s the access to that ‘free money’ that puts it firmly into this category.
If you’re self-employed or unemployed, you’d want to put in $1,043 per year (or we just make it easy and say $22 per week) so that you qualify for the above $521.43 from the government… Again – Free money….
As a side note – these MTC benefits really only apply to 18-65 year olds.
This answers our first question: Should I invest into KiwiSaver? The answer is obvious. Of course you should! If you are not investing into KiwiSaver, quite simply you are missing out on free money. If you are employed, this is an absolute must…
But, how much should you be investing?
Quite often we meet new clients who are investing more than their employer is willing to match. For example, they’re investing 4% and their employer is investing 3%. They’re putting an additional 1% into their KiwiSaver. Sure, it’s a good thing that they’re saving more for retirement, but they are effectively locking up those funds until they reach 65. They cannot get their hands on any of those invested funds (except in extenuating circumstances).
So let’s now discuss how much you should be investing into KiwiSaver.
I always say:
“Cap out your KiwiSaver contributions where your benefits (read: free money) stops.”
If you’re employed, chances are this is 3%. Sure, if your employer will match more, then you should invest more, but most employers will only match 3%. After all, they have to, it’s the law.
If you’re self-employed, that $22 is the limit to get the $521.43 per year MTC.
This does not mean that I am saying you shouldn’t be investing more towards your retirement. What I am saying is that those additional investments you want to make, should go into a KiwiSaver equivalent type fund, but one that is ‘unlocked’ should you need to access these funds.
There are Managed Funds options out there designed to run alongside, and even mimic your KiwiSaver, but that are unlocked.
I am not saying to sacrifice one for the other – I am saying to do both.
If you’re currently investing 4% and your employer is doing 3%, then you should think about dropping your contribution down to 3% and manually set up an investment for that 1% into a separate equivalent portfolio.
At the end of the day, if you feel that by having access to these funds, you would simply be too tempted to spend them, then perhaps locking it away into KiwiSaver is the only and right route for you. The above just happens to be a strategy that many of my clients have benefited well from. We have nearly $50M of client funds under management, and just over half of that is KiwiSaver. What I’m trying to say is that there is an ever-growing investment into a ‘side’ fund that is accessible if need be.
Something to think about….
We’ve briefly looked into the why and how much in relation to KiwiSaver – So what are some key points you need to look out for when making a decision to invest with an actual KiwiSaver provider?
I’ll list out a bunch of things below, and it’s up to you how many of these points you feel are appropriate to your decision making process when choosing a KiwiSaver provider (personally I think they’re all important!):
Performance
Are they in the top-quartile (top 25%) of all of the best performers of all time? How has their performance been compared to others over a long period of time (not just a year or two, or even five).
To be honest – I am loathe to put performance as the first criteria but unfortunately most people only know this to be the gauge to judge providers from. It’s not – and should make up part of a large number of considerations when making a decision about where to invest.
Sure, it’s very important. We want good performance right? But, as you’ll see below, it’s only part of the overall picture.
One thing to bear in mind is that performance should be ‘after fees’ are taken out. Performance is far more important than fees.
For example, it’s normal to have very low fees if you’re invested with a KiwiSaver provider who chooses a passive approach. Paying more for an active approach should be backed up with good net performance.
Longevity
How long have the team managing your money been around for? How long has their company been managing Kiwi’s money for? Do they have a long track record of implementing a particular investment mandate that has proven success.
It’s up to you how long you think would be appropriate to want to gauge the above by. Should it be a few years? Should it be decades?
Personally, I think an investment team should have been around long enough that they’ve been through many market cycles, bull runs, bear markets, and even black swan events (violent falls in the market over a short period of time).
At the end of the day, it’s not about how well known the brand is, it’s about the ‘people’ behind the scenes managing your money.
Risk Management
It’s all well and good to celebrate the highs, but what about when the inevitable happens, and we have market crashes? Does your KiwiSaver have some sort of risk management strategy in place to protect you from the downside?
By the way, KiwiSaver was born out of the ashes of the GFC – the decade that followed was a bull market – So, it wasn’t too difficult to post good returns over that time. What would really be the litmus test for KiwiSaver providers was when the next ‘black swan event’ hit. This was the Covid crash of early 2020.
Was there anything place to protect your funds when this market crash hit? I’m not saying you’d never experience any downside, but was the violent fall mitigated in some way? As in, you didn’t fall as much as the market did…
If there was a strategy in place, your climb back up the other side would have been quite the good experience, and you’d have long forgotten the affect of the market crash and the impact on your KiwiSaver funds when you saw them dip down.
Who Owns Them?
This one is a little subjective, but some like to know they’re investing with a company that’s owned locally, and even privately owned.
Who owns your KiwiSaver provider? Do you prefer to support local, or you’re not too fussed?
Socially Responsible
We spoke about this subject at length in a previous article. Again, this is a subjective criterion, and is up to you whether you want your provider to have a solid framework in place to choose investments in a socially responsible way.
You might be surprised to know that a lot of providers have investments in some of the following: Alcohol, tobacco, armaments, adult entertainment, palm oil, fossil fuels, gambling, etc etc etc….
Can you sleep well knowing your KiwiSaver fund could be invested into some of these things? It’s up to you if you have a problem with any of the above. But, there are certainly providers who stay well clear of anything that could be deemed socially ‘irresponsible’….
Asset Allocation Changing ‘Glidepath’
Will your KiwiSaver fund automatically pull you away from the volatility of growth assets the closer to retirement you get?
Only about 9 KiwiSaver providers have a ‘glidepath’ methodology in place to automatically rebalance your funds as you get closer and closer to retirement, and therefore needing to access these funds.
Some rebalance annually, some rebalance over longer periods of time.
I am a big fan of ensuring your asset allocation matches your age-based ability to take on risk/volatility/growth assets.
I don’t think it’s the right thing to ‘set and forget’ your KiwiSaver fund and never change the asset allocation.
Of course, the above will be different if you’re looking to buy your first home using KiwiSaver within the next 5 years. In that case, you would want to set your fund up in a conservative strategy. Again – seek advice on that.
A Dedicated Financial Adviser
So far, most KiwiSaver decisions have been DIY. The FMA’s 2015 review of KiwiSaver providers found that only three out of 1000 New Zealanders receive advice when joining KiwiSaver or transferring between schemes. Today, this should be higher given some of the changes the FMA have made, but anecdotally the vast majority of New Zealanders do not receive advice.
Unfortunately, as KiwiSaver balances grow, so do the consequences of making a poor financial decision. And investors need only make one poor investment decision, for example a switch from growth to income in the middle of a share market slump, to ruin a lifetime of investing.
Of course I would say that it’s imperative to align yourself with a Financial Adviser, but the statistics back me up.
A few years ago The Financial Services Council released the report Money and You. In it, they undertook a survey of 2,000 Kiwis. It found that people who had advice received an average 4% better investment returns, and had 3.7% more in their savings.
“To put this 4% into real terms; if a 25-year-old were to take financial advice and saved $2,500 per year, they would be $1.5 million better off at 55 than if they didn’t take advice. That’s a remarkable difference, and a benefit that many more New Zealanders should be receiving,” said FSC chief executive Richard Klipin.
To round this all out, you really to need to look closely at your KiwiSaver provider, the fund you’re in, and how you’re invested, and ask yourself if this really is right for you.
I hope the above points give you some serious food for thought around how you might go about selecting the right KiwiSaver provider, fund, asset allocation, and relationship to grow this very important player your wealth creation journey.
Reach out and let us guide you in your KiwiSaver journey!
Daniel Carney
Investment Adviser