Wednesday, September 27, 2023

KiwiSaver & You – YES, You Actually Need to be On Top of Your Fund & How to Get the Most Out of Your Savings

Look, here at Capsule we’re the first to admit that personal finance or knowing what’s going on with our KiwiSaver isn’t something that comes easy to us (ok to be fair one of us is good at it, the other two just tend to smile and nod in accounting meetings and Google stuff later on).

BUT, while it’s not one of our strengths, all of us are on a mission this year to be more financially independent and savvy – whether that’s investing, saving or finally actually understanding what the official cash rate actually means (THAT one is a work in progress).

And with some of us wanting to buy a house before we turn 75 (we know, good luck to us) we’ve also turned our attention to the beast that is KiwiSaver.

So here is your handy beginner’s guide for actually making your KiwiSaver work for you, whatever your financial goals are, courtesy of the Financial Markets Authority (FMA). Capsule chatted to Manager of Investor Capability at FMA Tammy Peyper about how to absolutely SLAY your KiwiSaver game.

Hi Tammy! Ok, so KiwiSaver is a very passive thing for so many Kiwis – can you tell us why we should ACTUALLY be opening our annual statements and taking stock of what’s going on in our investments?

Most people have KiwiSaver deducted from their pay and a have a “set and forget” approach. It’s easy to forget that KiwiSaver is actually a form of investment and it’s important to stay in the driver’s seat.  This means actively checking that your KiwiSaver is set up to work for you and that you’re on track to meet your goals. A great time to do this is around June when all KiwiSaver members receive a statement from their provider by either post or email.

When we avoid opening our KiwiSaver statement this can be because of the “ostrich effect.” The “ostrich effect” refers to the tendency to avoid negative financial information and, therefore, to avoid potential pain. If we think our KiwiSaver statement is going to show us that we may not be on track, we can put off facing this for as long as possible until we are forced to act. Knowledge is power and opening our statement and taking stock is a major power move.

Tammy Peyper of the Financial Markets Authority

And what does that actually mean, ‘to take stock’ – what should you be looking for? How do you know if you’re on the right track?

If you have been with your provider for twelve months or more your KiwiSaver annual statement will show your retirement projections which is how much you’re estimated to have at age 65 and what this works out per week, on top of New Zealand Super.

It’s worth thinking about how much you’re likely to spend each week. If your weekly projection doesn’t seem like it will be enough, there are a few things you can do.

Firstly, are you contributing enough? Increasing your contributions makes the most dramatic difference to your KiwiSaver balance. Even a small increase can make a big difference to your results long term.

Secondly, take a look at your fund choice. Growth funds can be more volatile in the short term but will generally have the best returns over the long term. If you are younger and have several decades until you retire, investing in a higher growth fund can be a good option to improve your projected retirement balance.  The balance will jump around but you have plenty of time to make back any losses before retirement age.

Thirdly, take a look at the fees you are paying. Fees are what you pay to the fund manager for manging your KiwiSaver. While fees are part of KiwiSaver it may be worthwhile to consider the impact fees have on your balance.

How do you look at projections, and what you should be aiming for if you’re looking to either buy a house or retire soon?

Your statement will show how much your KiwiSaver will be worth at age 65 – both a lump sum and how much this would amount to as a weekly income if you were to gradually spend this over 25 years.

The lump sum shows how much your balance is likely to be when you reach age 65. Meanwhile, your weekly amount shows much you could receive weekly if you leave your money in KiwiSaver and make regular withdrawals until your balance reaches zero at age 90.

If you’re looking to buy a first home, you need to look at your current balance. And if you’re working towards buying a home within the next few years, it’s worth considering if you’re in the right fund. A more conservative fund may deliver lower returns, but your balance won’t jump around as much, so you’ll know how much money you have to contribute to your first home. 

For those approaching retirement who won’t need to spend all their KiwiSaver money straight away might want to consider splitting some of their KiwiSaver money to a more conservative fund and keep some in growth.  Talk to your KiwiSaver provider or a licensed financial advice provider. 

How do know how much you should be contributing?

How much you contribute to KiwiSaver really depends on you and your circumstances. Think about the kind of lifestyle you want in retirement.  If you want some luxuries and a bit of travel, it’s possible that a 3% contribution may not be enough, depending on what age you were when you started contributing. 

Sorted has a retirement calculator that will help you work out the amount of money you’ll need by age 65. You can compare this number to your projected balance at age 65 which you can find on your KiwiSaver annual statement to see if you’re on track with your ideal retirement.  And, of course, you need to earn enough money today to be able to contribute more.

So some people would have stopped their Kiwisaver contributions during the pandemic.  Why do you think people should restart their contributions if they’ve stopped during the pandemic? 

By skipping your contributions, you miss out on the magic of compound interest where there’s a snowball effect with your money. The sooner and more regularly you contribute, the larger your snowball will grow and the harder your money works for you.

You also might be missing out on the government contribution of $521.43. You’ll need to have contributed a minimum of $1,042.86 by June 30 each year to be eligible. It’s worth noting this would be comparable to a 50 per cent return on investment – better than you’ll get anywhere. 

Women on average earn less and more likely to take career breaks and therefore retire with less. KiwiSaver is often the simplest way to set yourself up well for a decent retirement and is a good step towards financial empowerment. If you take parental leave, consider at least contributing enough to get the government contribution.

How do you pick the right provider – what you should be looking for?

A few things you should look for is fund performance and fees. Do you feel like you’re getting what you pay for? Does your provider make an effort to communicate with you and keep you informed? Is it easy to get in touch with them and find out information about your KiwiSaver?

Your KiwiSaver annual statement will show much you’ve paid in fees in dollars. Fees can have a big impact on your total returns over the long term. It’s worth keeping an eye on the fees you pay because, although the fees don’t change in percentage terms, they will increase in dollar terms as your balance grows.

These fees may feel justified if you’re happy with how your KiwiSaver is going and the service you’re receiving.

If you’re not happy with your current provider, Sorted has an online fund finder. KiwiSaver fund finder » Sorted

Otherwise, talk to your KiwiSaver provider or a licensed financial advice provider.

What is the difference between fund types?

Growth and aggressive funds tend to have more money invested in assets that aim for higher returns over the long term but generally have higher levels of risk.

Meanwhile conservative and defensive funds have the lowest but more predictable returns. These are best if you are wanting to access your money – for retirement or for a first home – in the next few years.

Balanced and default KiwiSaver funds are less volatile than growth funds and sit somewhat in the middle.

Your balance can go up and down pretty easily, and it could be easy to panic and change funds if you see your money disappearing! Why shouldn’t you panic if your KiwiSaver balance drops?

Markets go up and down, and this is a normal part of investing. KiwiSaver, and investing in general, is for the long-term. You may have noticed a drop in your KiwiSaver balance because of market volatility. But KiwiSaver was always designed with this type of market volatility in mind – it’s a long-term investment, there will be bumps along the road but over the long term you have time to recover any losses.

The important thing to remember is to stay calm and stay the course. If you switch funds while the market is down, you’re not giving yourself the opportunity for your balance to rebound and you risk crystallising your losses.

Find out more here!

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