Retirement game plan to hit the boards
Learning about KiwiSaver’s ups and downs is like a round of snakes and ladders, writes Rob Stock.
If you don’t know how much your KiwiSaver fund could rise or fall in the coming months, you are not alone. But one fund provider is trying to change that. Kiwi Wealth has set itself the task of trying to turn KiwiSavers into Kiwi investors, believing many see KiwiSaver as being similar to a bank savings account rather than an investment.
That may not be surprising. The language of KiwiSaver is one of accounts, balances and saving, but Kiwi Wealth’s Joe Bishop says the company is working on changing the mindset of KiwiSavers, including confronting them with the possible rises and falls of their funds in the coming 12 months.
Kiwi Wealth doesn’t have a crystal ball, but armed with assumptions based on a history of returns on assets including shares, property and bonds, it has worked out possible 12-month scenarios for its cash, conservative, balanced and growth funds.
It calls the scenarios ‘‘predictive’’, but doesn’t guarantee them as they are based on past performance, and past performance provides no certain guide to future performance.
Kiwi Wealth has a drive on to encourage people to work out if they are in the right funds, and has created calculators people can use to work out if they are.
As people struggle to understand the nature of risk, Kiwi Wealth presents people considering a switch of funds.
For example, this might be from a conservative fund to a growth fund, with the biggest probable fall their balance might experience (in alarming red) in the next 12 months, and the largest probable rise (in cheerful Kiwi Wealth corporate green).
Instead of doing it using percentages, which people generally don’t understand, it presents the information in dollar figures based on people’s individual balances.
Take the Kiwi Wealth CashPlus fund. For each $1000 invested, there is a chance of between an $18.60 fall in value to a rise of $85.20 over the next 12 months.
It’s a range of returns that will neither make someone rich over a lifetime, nor cause them to lose much sleep.
But bump up to a balanced fund, which invests in cash, bonds, and shares, and the range of returns per $1000 goes from red $124.40 to green $266.30.
Step up again to a growth fund and the range goes from red $223.10 to green $383.80.
The numbers are based on the actual asset splits in the Kiwi Wealth funds, so people with other providers would not be able to just assume the same range applies to their funds. However, for most similarly badged funds they would provide a rough indication of the possible ups and downs in the coming year.
Often rollercoasters are used as a means of illustrating the experiences of investing in a fund.
A snakes and ladders board might be more appropriate, though the look of boards would differ depending on how risky they were. On the ‘‘conservative’’ board the ladders would be short, and so would be the snakes, which would drop you back only a couple of squares.
That’s because funds which are predominantly invested in cash and bonds offer little chance of big gains but, similarly, bond prices do not have the same risk of crashing as share prices.
On the ‘‘balanced’’ board the snakes would be bigger, and so would be the ladders, as balanced funds hold more shares than conservative funds.
On the growth board, the biggest of the ladders would very tall indeed, and the snakes would be long and deadly.
That’s because shares offer the highest chance of big gains through their large investments in shares. The flip side of that is they also have a bigger chance of making losses, and those losses can come quickly.
Having a clearer picture of the risks of each type of fund can help people to psychologically prepare themselves to hold their course during negative return years, which will come over the investing lifetimes of many KiwiSavers.
The theory of KiwiSaver is that Research for Kiwi Wealth by Horizon Research found:
27 per cent of people didn’t know what kind of fund they were in. That is about 675,000 people.
37 per cent of people aged 25 or under were not sure of the kind of fund they were in.
31 per cent of KiwiSavers said they had not reviewed their fund choice since joining.
41 per cent did not know their KiwiSaver balance.
77 per cent had no idea what their nest egg would be worth when they reached age 65. investors drip feed money into markets throughout both the good and the bad years.
For Sam Goldwater from Generate KiwiSaver, years in which share prices have fallen can be viewed as buying opportunities when investors get to buy shares more cheaply. ‘‘It’s part of our job to try to explain that you can sustain losses in the short term, but that the best thing you can do is stick it out,’’ he says.
A long-term saver who panics and sells up after share price falls can end up crystallising losses, and removing the possibility of earning back those losses during any subsequent market recovery.
KiwiSaver expert Binu Paul applauds the Kiwi Wealth educational effort, saying the scheme manager was finding ways to ‘‘visualise’’ concepts that people find difficult to grasp.
‘‘They have the right approach. It is one of the few schemes doing it,’’ Paul says. But, he says, many KiwiSavers just won’t be paying much attention yet.
Research in the United States shows people only started to care about their defined-contribution retirement fund, known as a 401K, when the balance reached about 60 per cent of their salary, he says.
In Australia, retirement savers’ enthusiasm begins when balances equal the cost of a new car.