Beware the rose coloured glasses though, as it did look good when the govt put in $1,000 up front and $20 PW till 2014 / then $10 PW. After you turned 65*, the govt subsidies stopped, and it then became a normal investment fund.
*slightly different if you joined after age 60.
However how many people really know what fund their money is in, how much it can go up and down, or what risk are they be taking?
Cash – might average 2% to 3% nett and does not go up or down
Conservative – usually about 80% bonds and 20% shares – over the long term might average make 3% to 4% pa. nett, can vary plus or minus 2%.
Moderate - usually about 60% bonds and 40% shares – over the long term might average about 5% pa. nett – best year +15% and worst year could be -5%.
Balanced - usually about 50% bonds and 50% shares – over the long term might average 6% pa. nett – best year +25% and worst year could be -12%.
Growth - usually about 30% bonds and 70% shares – over the long term might average 8% to 9% pa. nett – best year +35% and worst year could be -20%.
For comparison purposes, 6-month bank deposits are paying about 2.5% pa. nett.
But my KiwiSaver has always gone up
KiwiSaver started out just before the 2009 global financial crisis and markets since then have been pretty much up and up and up. You can see it clearly from the MSCI world share market index.
But oops!! In August 2015 markets got a bit upset about slowing growth in China and a downturn occurred (right hand side of the chart).
The average balanced KiwiSaver return over the past six months is -2% - yes minus - (to end of February 2016).
Over the past 12 months the average balanced KiwiSaver has made about +2%.
Only a magician can consistently get returns above bank rates, year in, year out.
Who do you want to have your money with?
Check the bank or fund manager you use for integrity and reputation. Go into google and enter their name plus “scandal” (expect some surprises).
So is it a good idea for over 65’s to add money to their KiwiSaver fund?
It depends on how soon you need the money, and your cash flow needs.
Cash – suitable for the short term
Conservative – minimum 3 years for best results
Moderate – needs 4 to 5 years for best results
Balanced - needs 5 to 7 years for best results
Growth - needs 7 to 10 years for best results
Some KiwiSaver funds have a facility that allows you to draw down a monthly income which can be very convenient. They won’t pay the interest, but rather a fixed amount that you select
KiwiSaver fees are closely scrutinised by the government so you can be fairly safe in assuming that the fees will be reasonable. None the less you are fully entitled to ask about fund management fees, trading costs, fund membership fees and so on.
You have to compare apples with apples, and that can be confusing. Income funds usually hold lower risk bonds, and maybe a few shares, but there is an income fund out the
Fund names & risk
Fund names can be confusing too e.g. Income funds usually hold lower risk bonds, and maybe a few shares, but there is an income fund out there that invests heavily in high yield NZ shares. Not low risk, and not diversified outside NZ either (except for a few Australian shares).
Last year’s best, this year’s worst …………….
Last year’s best fund is all too often next year’s worst fund, so don’t read too much into past returns. Markets can turn on a dime and everything can change for a manager, especially if they have been following a trend, or have a narrow focus e.g. only hold a small number of shares.
Managers move around too and in NZ it is common to see them change companies every 4 to 5 years. Just one of many reasons not to chop and change funds too much.
So you are over 65 – should you add more money to your KiwiSaver account?
Maybe but first, do the following:
- Find out exactly what fund it is?
- How risky, or how volatile is it?
- Do you need income from it? does it offer a draw down facility?
- How soon do you need the money?
- Don’t rely on past return as a guide to the future performance
- If you are over 65, a moderate risk profile probably suits
- Make sure it is diversified widely over bonds, property, and shares
- Onshore and offshore – too many have a home bias and are heavily in NZ
- Have realistic expectations of returns at 2% to 3% above bank deposit rates
- Don’t chop and change funds
- Be patient
- Successful forecasting is usually luck so avoid those who claim they can
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is available on line.
Alan is an independent authorised financial adviser (AFA) FSP26532.
His disclosure statement is available on request and free of charge.