HOWTO MAKE AN EXTRA $100,000

A simple adjustment to KiwiSaver accounts could see millions better off.

Did you know that a simple adjustment to your KiwiSaver could make you thousands of dollars better off?

No? Then you are maybe one of the twothirds of New Zealanders who, according to the Financial Markets Authority (FMA), never check to see if their KiwiSaver will provide them with a comfortable retirement. That’s right, 66 per cent simply “set and forget” their KiwiSaver account.

The folly of this can be clearly demonstrated. The FMA use the ( hypothetical) example of 32-year- old electrician Lucas, earning $ 67,000 a year. He’s been contributing three per cent of his wages to a default conservative KiwiSaver fund for the past 13 years and his current statement shows he has $25,000 in his KiwiSaver fund.

A change in KiwiSaver this year means all KiwiSaver statements now include a projection which estimates the balance of the account at the time the account holder turns 65. Lucas’s projection estimates that he will have almost $200,000 when he’s 65 ($ 195,308). Including NZ Super, that would amount to $ 584 a week in retirement for 25 years ( assuming Lucas lives to 90).

However – and this is the simple adjustment – if he moved his money to a growth fund, the projection is that he’d have almost $100,000 more when he retired - $283,915, or $717 a week.

There’s another simple move too – as spelled out by the FMA’s manager investment capability, Gillian Boyes: “Increase your contributions if you can – because that makes the biggest difference – and if you can’t, then review the type of fund you are in.”

The example she gives is a fictional couple – Dave and Fiona. Dave (46) earns $160,000 as an HR manager, while his partner Fiona (45) earns $95,000 working part-time as a GP. Dave has saved $72,000 and Fiona $32,000 in KiwiSaver. Fiona took time out to raise their children so she has less than Dave, even though they joined KiwiSaver at the same time and are both in growth funds.

Combined, Fiona and Dave will have around $500,000 at 65 ($543,362) – around $1212 a week including NZ Super. If they both contributed four per cent of their salaries to KiwiSaver instead of the current three per cent, they’d have more than $600,000 when they retire ($612,809).

“Most KiwiSaver schemes have an online risk appetite tool that help you work out the best type of fund for you – depending on your reason for saving – retirement or a home deposit – and how comfortable you are with volatility over time,” says Boyes.

The volatility caused by the Covid-19 crisis caused many people to adjust their KiwiSaver accounts – but wrongly so, according to Milford Asset Management’s head of KiwiSaver, Murray Harris. Panicked KiwiSavers switched from share-heavy growth funds into cash and conservative funds in March as global sharemarkets plunged – with $1.4 billion in funds involved. Harris said: “Many of these members will never switch back to the fund they came from.”

April and early May saw some who panicked switch back into growth funds, Harris said, but the switch had cost them dearly with growth funds having already clawed back much of their losses as markets staged recoveries.

Since then another Milford spokesman, portfolio manager Mark Riggall, told Stuff that “peak fear” had turned into “peak optimism” with the surprise recovery – but he warned KiwiSavers needed to be aware more ups and downs may be on the way.

“We can expect these wild swings to continue but I don’t think KiwiSaver investors should be doing anything as a result,” Riggall said.” KiwiSavers should be looking five, 10, 20 years out – not one or two.”

Personal finance and property investment writer Diana Clement, in her recent NZ Herald column used the example of her child’s growth fund: “It has returned on average 8.95 per cent per year for the past five years. That’s an awful lot more than the 4.65 per cent average for conservative funds in that period. Volatility brings returns.”

However, Clement said major corrections were different, particularly “if you’ve banked on withdrawing a certain sum and the balance drops at that very moment in time. Anyone who needs to withdraw all within a five-year period probably shouldn’t be in a growth fund – just in case.”