Why your KiwiSaver balance will survive Covid-19
Diving KiwiSaver balances have led many Kiwis to panic, but the best advice from experts is to stay the course.
One of the most frightening aspects of Covid-19 has been its effects on our financial stability. This was already showing its hand as we headed towards lockdown via our diving KiwiSaver balances, causing dismay and uncertainty and around the (now-virtual) water cooler.
Depending on your type of fund, KiwiSaver has been riding the roller coaster of the pandemic along with the rest of us, but this is not as terrible for your financial future as you might think. Here’s what you need to know.
MARKETS WILL ALWAYS BE VOLATILE AT TIMES OF UNCERTAINTY
The dip in value of many KiwiSaver balances reflected this year’s peak period of uncertainty, particularly during March when we didn’t know what governments were going to do about Covid-19 and how it would affect us all, says Chris TennentBrown, ASB wealth senior economist. Some people panicked and switched their fund.
The peaks of fund switches tend to happen at the peak periods of uncertainty, which tends to tie in with the peak moments of weakness for markets, and that’s what we’ve seen this time around.
A month later, however, the markets have already bounced back halfway to where they were in early March, meaning those who made hasty decisions about their choice of fund during that period have already missed out on a decent period of recovery.
Your KiwiSaver account is similar to real estate in that its value will go up and down but none of that means anything until you go to sell it. Most people wouldn’t want to sell their real estate investment when the property market was lousy, and it should be the same with other investments. At times like now, it can be nervewracking seeing investment values changing every day, whereas with real estate, we don’t get those daily price signals.
Tennent-Brown says market volatility is part of the investment landscape and the last time we saw movements of this scale was during the Global Financial Crisis in 2008. Back then, KiwiSaver was in its infancy and most of our balances were fairly modest, so the dips in value were not felt as widely. He warns that similar scale events are almost certain to occur in the 20 years ahead, and they need to be factored in when setting up your overall savings structure.
“When markets are really volatile, it’s no time to change a well thoughtout investment strategy.”
THINK OF KIWISAVER IN TERMS OF UNITS
Your KiwiSaver account is not a bank account, Tennant-Brown says. Stop treating it as a cash amount; instead, view it as units.
These units represent “chunks of factories or government bonds that may go up and down in value, but they’re still assets that at some stage you’re going to turn into food in your fridge”.
The amount of units you own at any time doesn’t change unless you buy or sell them; rather it’s their value that moves up and down -- and the more units you have, the better off you’ll be in the long run. This is one of the reasons why, if you’re financially able, you should keep making KiwiSaver contributions.
And while markets are down, says Jonathan Beale, ASB general manager wealth, you’ll get more for your contributions. “Shares and bonds are cheaper, so your units will currently go further.”
WHAT ABOUT ME?
There are three main types of KiwiSaver members. 1. First home buyers
Those looking to use KiwiSaver for their first home should have been in a fund tailored to their timeframe, Beale says, probably shorter term and more on the conservative side of things so that they have a more predictable amount available when needed. “This is a good place to have your money during this volatile time,” he says. “Sharemarkets have not affected the more conservative funds as much as the growth funds, and the cash funds have not dipped at all.”
2. Those saving for their retirement
The largest group of KiwiSaver investors need to be calm and stay the course, says Beale, because your need to draw on your investment is a long way off. “We know it’s unsettling, but this is what markets do and this is not the time to make a rash decision. This will help you out in the longer term.”
3. Those in retirement
People aged 65 and over should preferably have a short-term spending option set aside rather than relying on their KiwiSaver balance, says Beale. “Remember that you’re probably going to be in retirement about half the amount of time that you worked. So you need that money to last and you probably need some of it in growth assets to help keep that money growing for you. That way, you can take regular withdrawals out of it like a bank account.” For more information, check out ASB’s Investment podcast at
asb.co.nz/podcasts and KiwiSaver and Investment Blog at asb.co.nz/blog
Disclaimer: This content is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial advice. As individual circumstances differ, you should seek appropriate professional advice.