Savings have a direct impact on your retirement quality of life and future plans. How can KiwiSaver accelerate your savings?

Almost two thirds of New Zealanders have a Kiwisaver account which are collectively worth over $104 billion. Given that New Zealand doesn’t have a compulsory superannuation scheme like Australia, that’s pretty good. But, one third of New Zealander’s are missing out on a scheme that really should be a retirement planning non-negotiable. This is because:

• Kiwisaver is so easy to sign up and manage
• Your contributions are automatically made before the cash even hits your bank account and there’s no risk of insufficient funds
• While you can apply for a contributions holiday, you can’t just skip a month on a whim
• The government and your employer contribute too

To create the retirement you want, you should have your KiwiSaver set up correctly and save at least $1042 a year,  even if the minimum contribution rate of 3% of your salary is not enough to reach the $1042 threshold. If your contributions fall short, top it up each year so you can receive the government’s contribution of $521.43.

But what do you do with your KiwiSaver after ticking the appropriate boxes on your Inland Revenue KS2 form? Alarmingly, about 10% of KiwiSaver members are still sitting in the ‘default’ fund they were originally allocated to by the IRD. This is a problem, for a variety of reasons.

• KiwiSaver fees: Some provider fees can be quite high, meaning you are making less money than you could be.
• Low returns: Default funds are low cost, lower risk investments. You could be missing out on bigger returns by not making an active choice.
• Ethics: Some of those default funds may be investing in war, tobacco, or a range of other less-ethical businesses.

There are two choices you need to make. Choosing your provider, and the type of fund. There are more than 25 providers available. Do your due diligence by checking:

• Their fees: How much will this investment cost you?
• Their returns: Which providers are consistently making higher returns?
• What kind of investments they make: are they ethical?

Once you’ve chosen your provider, you need to choose your fund. There are five types and which one is best for you depends on your appetite for risk and how close to retirement you are.

First, you need to figure out your risk profile. How averse are you to risk? The share market rises and falls and eventually recovers, but not everyone is comfortable watching the value of their investments take a hit. There are three types of personal risk profiles:

• Conservative: Low tolerance for risk. If you see the share market crashing, you can’t handle watching the drop in value of shares, and could make risky decisions such as pulling investments when they are at their lowest. You want to maintain your investment and keep pace with inflation, but aren’t looking for huge gains. By default, you’ll be conservative if you have less than three years before needing access to your money.
• Moderate: You can handle some risk, and don’t mind uncertainty. You want some capital appreciation and gains but also want safety and security of your money. You have around four to nine years at least, before needing your money.
• Aggressive: You want to watch your investments grow, and understand that the market will fall- but it will always rebound over time. You’ve got at least ten years before you need the money, and are happy to make some gambles.

Once you have an idea about your risk preference, you can choose your fund type.

KiwiSaver Fund Types

There are five main fund types to choose from.

Defensive

Defensive funds strongly avoid growth assets, with less than 10% of such assets being held. What shares are held tend to be ones that provide consistent small returns, regardless of how the overall stock market is performing. They are typically blue-chip companies, which are large multi-nationals that are well-known and stable. This includes companies like Johnson & Johnson or Unilever. While returns are stable over time, they won’t make big gains in times of boom.

While it is almost certain that your investment will not grow as much over the long term as riskier funds will, your chance of a negative return is significantly less, although there are no guarantees.

Defensive funds are ideal if you’re intending to retire in the next three years. It’s also best if you find it stressful to watch your investments rise and fall as the stock market booms and busts; the variation among defensive fund returns are very low.

Conservative

This investing strategy is about maintaining your capital investment, not growth or market returns. It’s about low risk blue chip securities, money market, and cash equivalents. Usually, about half of the investment will be in debt securities or cash equivalents, rather than risky assets. Funds only include 10% to 34.9% in growth assets.

Conservative funds are for those with up to three years before they need access, and those who are risk aversive. If you’re retiring soon or might need to access your funds, this is a good option.

Balanced

This type of fund, as the name suggests, is a balanced mix of growth and income shares. It’s created to protect your capital investment, while growing a modest amount. There’s usually a mix of low to medium risk bonds and stocks, with about 35% to 62.9% being growth assets.

Balanced funds are for those who can tolerate some risk and wants their investment to grow. Ideally, you need four to nine years set aside, although you can invest for longer.

Growth

This fund is about increasing capital and making financial gains. Growth stocks are typically smaller or younger companies who have the potential to grow at an above-average rate. While there still are ‘safe’ blue chip stocks and bonds in the mix, 63% to 89.9% of the holdings will be in growth assets.

These are ideal for those who have at least ten years before needing to access their funds, and a healthy attitude towards risk- sometimes, to make the biggest wins, you have to make the biggest gambles.

Aggressive

90% to 100% of aggressive funds are held in growth assets. This is about maximising returns by taking bigger risks. These funds aren’t about safety or maintenance of principal, but capital appreciation.

You really should have more than ten years to play it out, and you need a high tolerance for risk. If you’re young, and don’t want to access your shares at any point in the foreseeable future, these are an option. Make the best money you can while you have the biggest window of time before retirement, and while you can take advantage of compounding interest.

Talk to the Professionals

If you still are confused, we understand. It can feel overwhelming to make these big decisions when you aren’t a financial expert. Luckily, at Smart Adviser, we can help you take control of your finances and feel confident in your choices.

Contact us to make a time to chat about your goals, your future, and how to make KiwiSaver work for you.