Currently there are nine KiwiSaver providers who are a ‘default’ provider. Among a range of funds they manage, they have on offer a ‘default’ fund. Each provider has a term of 7 years to enjoy that status. Every seven years a competitive tender helps choose a new group.

There were five default providers chosen when KiwiSaver launched in 2007. The current group of nine providers was chosen after the review undertaken in 2014.

Encouraging lazy investors

There are around 25 KiwiSaver providers in total. One of the unintended consequences of having a system of designating a handful of providers as ‘default’ is that it has resulted in a cohort of lazy investors.

It has also created a lop-sided provider market with the default providers collectively managing a significant majority of the $60 billion in KiwiSaver savings. This raises concentration risks for the KiwiSaver initiative as a whole.

Most people find decision making hard. More so when the decision is about investments and finances. As a result, a fall back option is appealing considering the IRD randomly allocates an undecided member to one of the default funds. As such, it is not surprising that the default provider system has partly been responsible for a culture of laziness.

Digging the hole deeper

In the current round of submissions, one of the suggestions raised is the idea of choosing a new cohort of default providers and then to transfer existing default members across to the funds managed by the new cohort of providers.

This suggestion, as well-intentioned as it is, raises a number of issues.

A mass transfer will come at considerable administrative costs. You will likely bear this cost. Fair to say, it will be a one off cost, but a drag on your returns nonetheless.

Additionally, a mass transfer away from an existing pool of providers to a new cohort of providers on any basis makes it grossly unfair to the current providers. These providers have gone to considerable lengths over the past years to sign up members and invested in encouraging existing default members to make active choices.

A new default provider will have an unfair advantage in this instance given they effectively enjoy a free lunch at the expense of current providers.

Closing the gap

A more elegant solution would be to do away with the system of ‘favouring’ a handful of providers with a default status.

The first determination should be how fit for purpose a provider is to manage our life savings. If a provider is not fit for purpose then they should not be allowed to operate. On the other hand, if they are fit for purpose, then place obligations on them to:

• create a fund in their suite of products to be a ‘default’ fund. Those members who don’t make an active choice get allocated to this fund.
• engage/ educate the member in moving them into an appropriate fund, within a mandated time-frame.

This approach eliminates most of the challenges with the current default system.

Interested?

One observation is pretty obvious from the above. Your future is truly being determined by folks you don’t even know exists, if you are a default KiwiSaver member.

Get involved if that thought concerns you. Spare a thought for how your money is invested. We have made it super easy for you to make an informed decision– just click here!

The post KiwiSaver default member? Someone’s deciding your future for you appeared first on PocketWise.

Over half of those funds are yet to recover their losses fully by end of March this year. This is despite a very strong recovery in markets in the first three months of this year. Are you confident enough that you are in the KiwiSaver fund best suited for you?

Turn in sentiment for global markets

Funds invested in higher risk assets, such as shares, suffered most of the losses in the previous period. This included both diversified funds (which invest your money across different types of asset classes), as well as those funds that invested in just one type of asset (for e.g., in shares of global companies).

That follows on from almost a decade of steady positive growth. Geo-political uncertainties including trade wars have blunted market sentiment globally. Based on what’s unfolding, it doesn’t appear as if there will be any let up in this nervousness looking ahead. In that context, the “type” of KiwiSaver fund you choose to contribute to can have a huge impact on your retirement savings. By hundreds of thousands of dollars.

What are your options?

You should be aware that there are about 230 different KiwiSaver funds to choose from. Each fund comes with its own flavor, based on what types of assets it invests in. How and what a fund invests in is determined by the objective the fund is trying to achieve.

On that basis, it should be expected that some funds see much higher levels of ups and downs relative to others. On the other hand, these funds have the potential to provide higher returns over longer periods.

You should expect ups and downs in returns when invested in financial markets. But, you are perhaps not putting your money to the best use if you are not in the right category of funds. The question is are you taking enough risk to achieve your longer term goal, or not?

Finding the right fit

For a lot of people it may be very appropriate to be in a higher risk fund. The worst you could do is to make a decision to switch KiwiSaver funds simply because of short-term losses. That simply locks in losses, without the opportunity to recover those losses over time.

Typically, the longer you are able to remain invested in markets the better your chances of recovering any losses. Your investment time-frame should provide you a good yardstick as to which type of fund to choose. You should then take into consideration the fees charged by a fund. You could also factor in the fund’s social consciousness into your decision making.

Whenever you are ready to review your KiwiSaver fund, use this very simple tool to help you with your decision. The tool features all KiwiSaver funds available for you to contribute to.

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From 1 April 2019 the KiwiSaver contribution rate you can choose from could be any of 3%, 4%, 6%, 8% or 10% of your salary/wages. Currently you have only three contribution rate options: 3%, 4% and 8%.

When put in percentage terms, an addition of a 6% and a 10% contribution tier does not look dramatic. But, how about if you happen to be one of those sharp savers able to stash away that little bit more for retirement? The impact of raising your contribution rate to one of these new tiers can put hundreds of thousands of additional dollars into your retirement account by the time you hit that age. Here’s how.

Raking in the dollars

Amanda is 28 years old and has been contributing to her KiwiSaver account over the past 5 years. She has saved up about $25,000 in her KiwiSaver account. She has chosen a contribution rate of 4% of her $60,000 salary. Her employer tips in the minimum 3% into her account. With everything else remaining the same Amanda will have $682,000 to enjoy in her retirement years.

With good timing she has just been given a promotion at work with a bump up in her salary which is now $70,000. If she made no changes to her KiwiSaver contribution rate, she will go on to save $755,000 by retirement. This is because her contribution in dollars has gone up. 4% of $70,000 vs. 4% of 60,000.

Instead, Amanda decides to bump up her contribution rate to 6% (one of the new tiers). She figures that it is not as much of a financial strain given her increased salary. At 4% she would contribute $2,800 each year. At the higher 6% contribution rate her annual contribution goes up to $4,200 – well within her salary increase of $10,000 (even after tax). Affordable –  considering she hasn’t dramatically changed her lifestyle and her expenses haven’t gone up much.

At this higher contribtion rate, with all else remaining the same, Amanda will have about $923,000 when she hits retirement age (currently 65). 

Amanda is better off by a massive $168,000 as a result of her decision today to increase her contribution rate!

Where’s the catch?

Yes, agreed you can make a notable difference to your future lifestyle in retirement with small increases in contributions now. But, you have to remember that KiwiSaver in most circumstances, is locked away till you are eligible for retirement. While the rules allow you to access your savings for a first home or at times of financial hardship, these are really rare exceptions.

Any contributions you make over $1,043 a year attracts no additional rebates from the IRD. There aren’t any notable tax benefits from making higher contributions. So, if access to more liquid (or easily accessible) savings is important for you, then choosing a higher contribution rate into KiwiSaver may not be as appealing to you. Check with your financial advisor.

See how your KiwiSaver fund compares with others out there.

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With over 250 KiwiSaver funds to choose from it is not at all surprising that people are daunted by the prospect of figuring out the right fund to go with. As a result, invariably either you end up in one of the 9 default funds or you go with whichever fund your partner, best friend or favourite colleague at work is invested in. 

Easy, as far as decision making is concerned. Fatal, because of what you may be missing out on.

The fact is, small differences in what you earn from your fund over the following years can have a dramatic impact on how much you end up with when you inevitably end up in retirement. Now that the results for 2018 are out, let’s scratch the surface a bit and dig behind the numbers to see what it all might mean for you.

If you know which fund you are invested in, click here to find an estimate of how much you may have in your KiwiSaver account when you retire. Note, we have had to make a few assumptions that we have explained.

Funds come in different categories such as Conservative, Balanced, Growth etc. depending on how much they are likely to rise and fall in value from year to year (given the type of assets they invest in). On that spectrum, conservatively invested funds will have smaller swings in earnings from year to year than balanced funds which invest in slightly more volatile types of assets.

Let’s assume you are in the middle-of-the-road category of Balanced funds. On average, these group of funds have earned about 8% year on year (after fees) over the past 10 years, a reasonably long time frame (given KiwiSaver has been around for only 11 years!).

What an 8% earning means is that for someone on a $70,000 a year salary, contributing 3% over the last 10 years is about $64,000 in their KiwiSaver account today. 

But, averages can be misleading. Within the category of Balanced funds the best performing fund earned just over 10% year on year and the lowest earning fund about 6%. How does that translate to dollars today for someone saving up over the last 10 years?

If you were in the higher performing fund above that would mean a balance of $72,000 and in the other fund a balance of $57,000. That’s a whopping $15,000 difference in fortune over just 10 years.

If that doesn’t feel like much over a 10 year period, consider that if the same differentials in earnings continued on, for a 30 year old, the difference when they retire is between $1.2 million vs. $485,000 – that’s an eye-popping benefit of $715,000!

So…..do you know which KiwiSaver fund you are in? Find out more about your KiwiSaver fund here.

The post Spoilt for choice, but are you missing out on big dollars? appeared first on PocketWise.

We are at one of those rare times in KiwiSaver’s history that members will be facing losses, much of it related to issues in investment markets as 2018 wound down. 

KiwiSaver funds are investment products which pool together the contribution amounts from individual members, employers and the Government and uses that money to collectively buy investment assets. Assets such as shares are owned for their potential to grow in value over longer periods of time (accepting the short term fluctuations in their value) while assets such as bonds are owned for its ability to generate a regular and stable income (at the cost of perhaps lower returns than shares over longer periods of time). Over time, fund managers trade in these assets making buying and selling decisions, hoping to make a profit.

A majority of KiwiSaver funds are diversified, meaning invested in a mix of stable income generating assets and relatively riskier assets like shares.

Investment market wobbles

2018 was marked, especially in its final months, by wild swings in investment markets leading to sharemarkets around the globe giving up significant gains after many years of growth. As a result, about 80% of all diversified KiwiSaver funds lost value in the process, over 2018. But your fate would have depended on which category of funds you are invested in, or the mix of assets your fund invested in.

At the worst end, funds lost about 7% value in 2018. On a savings pot with $20,000 that translates to a loss of about $1,400.  It should be noted though that it pays to be astute not only about which category of funds you are invested in, but also which particular fund within a category.

For example, if you consider the Balanced fund category the best performing fund actually gained about 1% while the worst performing fund saw a loss of about 4.3% in 2018 – a substantial difference of 5.3% between two similar category funds. That translates to $5.30 for every $100 you have in KiwiSaver. On a $50,000 balance that’s a $2,650 difference.

But, the actual difference will be much more, considering your balance doesn’t stay constant through the year as regular contributions from you, your employer and the Government are being added on to the fund. So your gains and losses will be amplified to that degree.

Your decision makes all the difference

It’s not right to say this is the first time investment losses have been seen before in the short history of KiwiSaver. In fact, it was not long after KiwiSaver was set up in 2007 that the global financial crisis came along. But the difference between the impact of recent volatile markets and the impact of the global financial crisis is that back then savings balances in most KiwiSaver accounts were minimal, meaning the effect of a loss would not have been as obvious or dramatic as now.

So how safe is your money in your KiwiSaver account, and should you be worried about recent gyrations? For as long as you are invested, take it that you will see some degree of swings between gains and losses. By how much, will depend on what your fund is invested in. As long as you don’t need to withdraw your savings immediately, these losses are only on paper. Over longer periods of time there is a greater likelihood that these funds will recover their losses.

Much of your future prospects will rely on the choice of category you make. It will also be determined by how good your fund’s manager makes decisions around buying and selling of assets in the fund. 

Choose wisely! You can choose appropriate KiwiSaver funds by simply responding to a few questions here which should act as a handy guide for you.

The post How safe is your money in KiwiSaver? appeared first on PocketWise.

Your personal financial journey is a long one. Pretty much starting from when you start earning/receiving your first dollars (whenever and however that is!), or when you accept a loan from someone.

It then continues on till you kick your bucket at some stage. Even in death, if you didn’t sort out your estate before you passed on, then financial issues will still raise its head – but on the bright side, you won’t be around to face them! Putting those morbid thoughts aside, have you ever wondered how you are going to fund your entire financial journey?

You are likely going to spend about 40-45 years of your life working. That is also the time you have the best chance of earning an income from salary or wages. The period from when you are 20 to about 65 are also the years you are most likely to be building up your assets (for example buying a house or investing in shares etc.). But, given all the advances in the field of medicine and a better of quality of life, it is likely that you may live up to be 95 or 100. Meaning, you have a period of 30 years after you retire when you are also highly likely not to earn an income from a salary or wage.

This stage in life is the ‘drawdown’ stage – literally meaning you are drawing down the wealth you have created prior to retiring.  So the question for you is whether you are on track to build up enough wealth to be drawn down for the rest of your life. Clearly, part of the challenge is you don’t know how long you are going to live.

Being financially resilient is to have a plan or a strategy to give you financial independence throughout your life – being able to spend on the things you would like to continue enjoy doing in life.

While New Zealand has a national retirement scheme (NZ Super), individual entitlements from this Govt. initiative are highly unlikely to be sufficient to maintain the lifestyle you want to in your retirement years. The KiwiSaver initiative was introduced 11 years ago to provide a supplementary savings pot for yourself, over and above your NZ Super entitlement.

To put some context to what it could mean in real dollar terms. Take the case of a 30 year old who is contributing to KiwiSaver at the 3% rate and assume they are on an annual salary of $60,000, and invested in a fund earning an average 6% p.a. This individual will have close to half a million dollars in their KiwiSaver account by the time they hit retirement age – that’s a serious pot of money!

So then the question arises – are you sure you are in the right KiwiSaver fund that is going to maximise your retirement balance? That needs homework on your part.

A big part of being financially resilient is being smart about how you mange your money. Do you know if you are invested in the most suitable KiwiSaver fund? There are about 245 different funds you can choose from and they all come in different shapes and sizes – different fees and costs and different risks and vastly varying performances.  Choose carefully!

Compare KiwiSaver funds here.

The PocketWise Team

The post Money Week – Your personal financial journey appeared first on PocketWise.

The KiwiSaver retirement savings initiative commenced in July 2007. Over the last 10 years and a bit since then, about 2.8 million Kiwis have opened KiwiSaver accounts and in aggregate accumulated close to $50 billion in savings.

Members choose the Scheme and the fund or funds where they want their savings invested from about 250 different fund options. The 22 Providers offering retail KiwiSaver schemes have designed funds to cater to a variety of investor tastes either by investing in one type of asset (single sector funds) or by creating a mix of different assets (diversified funds). Fees and costs associated with these funds vary widely and as expected so has performance returns.

The report is an observation of how KiwiSaver funds have performed over time, in the context of the annual fees they charge.

Summary of this report was published on NZ Herald on the 3rd of July

Context

The study considered all retail KiwiSaver funds currently on offer.

The selection criteria included:

• all funds with at least a 5-year history as of March 2018
• all diversified funds

Based on these criteria, 103 funds were identified.

The study relied on publicly available data on returns and fees and considered net returns (after fees and tax).

For the period ending March 5-year rolling returns were considered as far back as possible – in this instance the 5 years to March 2013.

The 10-year returns of funds that have a 10-year history were also calculated. There were 70 funds identified in total on that basis.

Funds were assigned into different categories based on their asset allocation.

For each category and for each time-period the cheapest 15% of funds were compared against the highest performing 15% of funds.

Observations

In the first round, all funds were assigned to 5 categories based on their asset allocation and on that basis the following resulted.

Point to note: Given there were only 5 categories, the spread of asset allocation within each category was broad, which would impact the results. For the cheapest 15% and the highest returning 15% of funds the asset allocation ranges were noted as below.

In three instances highlighted in the table above, at least one of the cheapest 15% of funds featured in the list of the highest performing 15% of funds.

In the second round we narrowed down the asset allocation ranges within the three specific categories. As a result the number of funds reduced as expected, to 47.

On that basis the following results were observed:

In two instances highlighted in the table above, at least one of the cheapest 15% of funds featured in the list of the highest performing 15% of funds.

Applying the same principles over a 10 year period on the narrow range of asset allocation resulted in the following observations:

Points to note

• KiwiSaver funds launched in the last five years were not included, given their short history. Some of them happen to be the cheapest available. As such, over time the above observed trends are likely to change.
• The study was purely a point-in-time analysis across a 10-year period and does not provide any guidance on future direction of such trends. In KiwiSaver’s short history, for a majority of the time, markets have been buoyant and as such in recent years these funds have not seen a major downturn.
• The periods considered are only 5 year rolling returns and arguably too short. An observation of 10 year returns to March 2018 also reflected a lack of meaningful overlap between the cheapest versus the highest returning funds in each of the category. But, note that given the short history of KiwiSaver only one set of 10-year data exists.
• 5 year rolling returns for the period to June-end each year were also observed – with very similar outcomes as above.
• When it comes to KiwiSaver funds, ‘you get what you pay for’ does not hold true. Given that returns are not guaranteed, but fees are charged regardless of gains or losses in the fund, a higher fee is a guaranteed drag on returns. As such, it is a significant determinant of future savings balances. Paying more fees does not necessarily mean earning more from those funds.
• Choosing the right category of funds is critical to your future savings balance. Then focus on identifying funds that are value for money. It is prudent to consider returns net of fees and taxes.

Remember, you can always compare KiwiSaver funds using our simple comparison tool to find the right fund for you.

Have any questions? Flick us a message on our Facebook page.

The PocketWise Team

The post Have the cheapest KiwiSaver funds been producing the highest returns? appeared first on PocketWise.

• You can now contribute 6% or 10% of your salary as your regular contribution to your KiwiSaver account;
• If you take a contribution holiday, you now only have one year to renew it;
• You can now open a KiwiSaver account even after you turn 65.

The above changes are now contained within a Bill in parliament that is in the process of being written into law over the next few months. Any changes are expected to take effect from 2019.

More options for how much you contribute

As per current rules you can contribute 3%, 4% or 8% of your salary/wages to your KiwiSaver account. It is up to you as to whichever tier you pick. Today’s changes announced by the Government mean that now you can choose 3%, 4%, 6%, 8% or 10% of your salary/ wages as your contribution rate.

So, if you had wanted to put aside more into your retirement fund but couldn’t afford the jump from 4% to 8%, you now can choose to contribute 6%. And, if you have some more lazy money floating around that you have been wanting to put aside then you can also choose 10% to be allocated to your KiwiSaver account.

If you are wondering what that means for you in dollar terms here’s what it means. A 30 year old today earning $60,000 in annual salary and contributing 4% will have about $670,000 in retirement in a fund earning 6% p.a.

Now, if they increase their contribution to 6%, in the same fund, they will have $830,000 – an additional $160,000!

Our Kiwisaver fund comparison tool has been updated to reflect the new contribution rate options. Check it out!

Squeeze on contribution holiday

About 135,000 Kiwis are on contribution holiday. What does that mean. Well, currently you are able to choose to temporarily halt your contributions into your KiwiSaver account for up to 5 years at a stretch. You can then at the end of 5 years choose to keep renewing that for another 5 years and keep going till you hit 65.

With todays changes any contribution holiday will be valid only for up to 12 months. After which you will have to apply for another another holiday for up to 12 months and so on.

In some ways, this is probably a good thing. Unless you are in dire financial trouble it’s always best to put any little something you are able to towards your retirement. Having to renew contribution holidays each year may discourage some Kiwis from giving into the temptation of using the facility unnecessarily.

Turned 65? You can now open up a KiwiSaver account

As per rules, only those under the age of 65 can open a KiwiSaver account. With today’s changes you can open a KiwiSaver account even after you turn 65.

Given our life expectancies are on the rise, someone at 65 today may well have an investing time frame of 30 years ahead of them. Why is that fact important? The idea is you are able to outlive your money in retirement. Say you live up to be 95 – that is 30 years from today – are you in the fund that’s going to grow fast enough to achieve that growth in your savings over the remaining years? We’ll address that in another blog.

For now, if you are joining KiwiSaver after you turn 65, remember to choose funds that are appropriate for your investment timeframe.

The post Big changes to KiwiSaver – How do they affect you? appeared first on PocketWise.

Take for example, what you do with your KiwiSaver account. For those of you who pay attention to it regularly, you are likely to not only keep track of how your balances are growing but also how your fund is performing relative to other funds in its peer group. Keeping tabs will allow you to ensure you are in the most appropriate funds over time.

All under your control

You are able to transfer between KiwiSaver schemes and funds at any time of your choice. You have the complete freedom to do so. After all, it’s your money!

The objective should be to ensure you maximise your KiwiSaver account balance by the time you are eligible to withdraw it, by ensuring your money is invested in the KiwiSaver fund that is best suited for you at any point in time. ‘Best suited’, meaning the one that takes into account how many years you are away from being eligible to withdraw your KiwiSaver account balance, the category of funds that align with your appetite for riskiness, those that have reasonable fees and costs etc. Find out more in our free ebook on “How to pick the best KiwiSaver fund in 4 easy steps”. You can get your free copy by signing up to our newsletter.

Enjoying the million-dollar lifestyle

Why is keeping on top of your KiwiSaver that important? Well….here’s a sobering thought.
Based on some very conservative assumptions*, a 3% per year higher return on your fund will more than double your savings in retirement, to $1.23 million. Having said that, the focus should not be only about simply being invested in the best ‘performing’ fund at any given point in time. Because, it’s almost impossible to predict next year’s winners. But, it’s definitely possible to narrow your chances to a handful that fit your circumstances.

Of the over 2.8 million KiwiSavers in total, roughly a 150,000 people transfer between Schemes each year. That’s a pretty small proportion. The fact is, a majority of KiwiSavers are yet to pay enough attention to their savings, because there is no instant gratification. Which would explain most of the laziness observed.  Even though the stakes are this high.

Death by paperwork

But, in reality even for those who have made a decision to transfer to another KiwiSaver scheme there is still the friction when it comes to actually making it happen…largely given the logistical nightmare around paperwork when it comes to transfers. Often preferring to not act at all, because it’s ‘all too hard’. You know you need to transfer but you just can’t be bothered going through that experience.

As innocent as that decision might appear here and now, clearly the impact in a few years will prove to be a costly one –  about a half a million dollars!

Making it simple and easy

Knowing all of the above, and having got feedback from a number of you, we have been working hard behind the scenes alongside some of the KiwiSaver scheme providers to make scheme transfers as simple as possible for you. Check out how easy transferring to another KiwiSaver Scheme is.

We will continue to add more providers over time as we implement customised solutions for each of them. We figured it’s best for you that we put in the hard work in the background, so you find it real easy to do what you’ve got to do! Invest responsibly.

*Assumptions: 30 year old with a current balance of $15,000 in their KiwiSaver account contributing 3% to KiwiSaver from their $60K salary with wage inflation of 1% p.a.

The post Making it easy for you to manage your KiwiSaver investment appeared first on PocketWise.

Investment markets are always on the move, sometimes up, sometimes down or even flat-line for a number of years. So if you have money invested, then expect losses at some stage. History reveals that markets don’t keep going only in one direction for long periods of time. Meaning, it’s always good to take a stock-take when you have had long runs in the same direction – now would be a good time.

In the context of KiwiSaver, how much of an impact investment markets will have on your retirement savings, will depend on the type of fund you are invested in and where your money is invested. You can quickly find out where your Fund is invested by clicking on the more details tab on our KiwiSaver fund comparison page after finding a list of suitable funds.

But before any alarm bells start ringing, remember, recent negative events in global share markets are in some ways healthy for your regular KiwiSaver savings plan.

Here’s why.

Benefits of regular savings

This assumes that your contributions get paid to the Provider regularly, in line with your salary payment, or as per a regular schedule that you have set up.

• Each contribution you make, buys you a certain number of units in your Fund.
• The number of units you receive depends on the price of a unit on that day (typically, all funds value their units daily).
• So, while your contributions may be a fixed amount, the number of units you receive each time will fluctuate as per the unit price. The lower the unit price, the more the units you receive, and vice versa.
• The price of a unit in your Fund depends on the value of assets it invests in. When those assets fall in value, so do the units. So, when your Fund falls in value, in line with the assets it holds, you get more units.
• Over a period of time, this protects you, to an extent, from the vagaries of investment markets.

This concept is called dollar cost averaging, and works wonders for your long-term retirement prospects.

Paper losses

Regardless, any loss is painful – but also remember that the loss is only on paper. You don’t crystallize any losses till you redeem your units in the Fund. Hence why it’s important you are invested in Funds that are appropriate for your investment time frame.

So, if you are invested in, say, a growth Fund and intend to redeem your savings in another 20 years, then the recent losses wouldn’t matter as much. But, if you are invested in the same Fund with a timeframe of 12 months or less, your prospects may be significantly dampened.

Here’s a nice and easy way to figure out some Funds that could suit you. Happy hunting! If you have any questions, just ask us.

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