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Article  •  22 June 2020

 

Tales From a Financial Hot Mess: Making Sure Your KiwiSaver is Set Up Right

With the recent instability in the world and our finances, how would you feel if I told you there was an easy way to get free money to save for your future? That it was tightly regulated for safety, loaded with tax breaks and extra cash, and all you had to do was put some money into it yourself?

That’s good old KiwiSaver for you. It’s a candy-coated savings plan to help you figure out your future. Once you’ve got it sorted you can relax, knowing you’ve done something good for your future, and nothing else is needed from you.

The trick is in sorting it in the first place. Because while KiwiSaver is beautifully simple, it still has tricky parts that can ruin your plans, stop you getting the most out of it, and stop you from getting the free perks you’re entitled to. After the impacts of Covid-19, it's now more important than ever that your money is in the right place to give you financial security.

So check out this extract from Tales From A Financial Hot Mess, to make sure your KiwiSaver is set up right.

Chapter 9: You’re doing KiwiSaver wrong, and it’s costing you

The feeling of success that came from small budget changes and wiping out my overdraft gave me the confidence to run a critical eye over everything else I was doing. I was finally hitting goals and successfully putting aside spare money in my savings account. The looming sense of dread had dissipated. I was controlling my own money, instead of it controlling me.

I was also starting to itch for more than just saving a few bucks here and there. I was starting to realise that getting some savings together was only the beginning.

It’s unfortunately true that you have to have some savings to draw on in times of need, but the rest of your money should be put to work earning you more money. If you sort that out, it could become an income that keeps you afloat in troubled times, like if you unexpectedly lose your job or have a health problem. How nice would it be to not be a wage slave anymore? That if you had a bad boss or a job you didn’t love, you could actually have the freedom to walk away and find something better?

I started to investigate investments. Of course, there’s property investment, but it’s very difficult to get the deposit together if you’re part of the younger generation. And it’s not exactly open to that ‘a little bit, often’ strategy that works best for those of us who are new to this.

I cautiously started to look into shares, only to find – to my surprise – that many of the experts sang the praises of starting with KiwiSaver.

In hindsight, it’s blindingly obvious. Even when you’re a newbie, you’re actually already an investor, and you should start with what you already have. Boring old KiwiSaver is a wonderful, gentle introduction to the world of investing and the sharemarket.

Most working New Zealanders have an account, whether or not they’re paying anything into it. That money is then invested for you. It all depends on what type of fund you have, but it’s usually some mix of cash, bonds and shares.

Maybe you’re one of the few workplaces left with its own retirement scheme, or you work in another part of the world – there’s almost always an equivalent retirement scheme floating around, and they’re usually candy-coated with free money to persuade you to take part.

Figuring out the system you’ve got and then working it to your advantage is a smart place to start investing. If I walk down the street and see $20 on the footpath, I don’t leave it there. I pick it up.

Don’t flick the page just yet. I know many people are scared of shares or think that they’re incredibly risky and, worst of all, complicated. Heck, I thought that in the past. Before overhauling my relationship with money, I always felt like ‘investing’ was something done by old men in suits. At the very least, it was done by people earning six figures.

I soon came to understand that that wasn’t right. Wealthy people invest, sure, but they don’t invest because they’re wealthy. They tend to be wealthy because they invest. The chicken comes before this egg.

But I was far from alone in my assumptions. In July 2018, the Financial Markets Authority released its annual survey on how New Zealanders felt about the financial markets. Older men with high incomes felt the most confident about investing into the financial markets. Women and younger people on low incomes were the least confident. It’s one of those issues that becomes a self-fulfilling prophecy pretty quickly.

Many people will say they don’t have enough money to start investing; but that’s the wrong way to look at it.

EVEN IF YOU START with a very small balance, maybe contributing a small amount, but you do it regularly, that compounding effect will leave people very surprised at the lump sum they can finish with.
Investing isn’t just for the wealthy people who already have large sums of money. It really is for every age and stage. For young people, even if they only have a small amount, it really is to their benefit to start investing, and investing early.
Mark Fowler – head of investments, Hobson Wealth Partners

If you invest a little bit frequently, the idea is that it builds up and makes you less dependent on the job you go to every day. Even better than a savings account, you get side income trickling in, which builds up to a healthier flow every time you contribute to it.

Now okay, for retirement funds like KiwiSaver you can’t touch that extra money until you retire, but you do build up a nest egg for the future and learn how investing works. Soon enough, you’ll be ready to step up and take on investments outside of the KiwiSaver safety bubble where you can use the income now if you need to. One step at a time, and the first important step is your retirement fund.

This is something I could have learned quite early in my journalism career if I’d just been paying attention. One of my colleagues back then was a very nice man, but was clearly doing the bare minimum and hoping to get a redundancy payout soon. I remarked on it one day to a friend, wondering what the business journalist planned to do if the redundancy worked out and how he would survive without a salary. Their response honestly surprised me.

‘But he’s a business journalist,’ my friend answered, looking at me like I was an idiot. ‘He has a cushion.’

‘What?’ I answered. ‘But he’s paid the same rubbish as the rest of us, right?’

‘Pretty much, but he gets to watch the market and talk to experts all day. Every time he has some spare cash, he invests it.’ My friend took in my surprised face, and rolled her eyes. ‘Frances, every business journalist is rich. Didn’t you know that?’

No. No, I did not know that.

As I have pivoted to do more business journalism, I have unfortunately learned that no, not every business journalist is ‘rich’. But they definitely tend to have a better money situation than other journalists, despite being paid similarly. It helps to have the basics of financial knowledge, then you can learn how to protect yourself when a chilly financial wind blows.

Luckily, that’s not something that’s only open to business journalists. Taking in some expert knowledge is certainly a good idea, but you don’t have to talk to them every day. I would actually warn against watching the market every day. Really, you just need to set some investments up then leave them to do their thing. That beautiful compounding.

Each investment you make buys you a piece of independence from bad jobs, bad relationships, hell, a bad life if you’re really miserable. One stone at a time, you can build a wall to keep out life’s nasty surprises.

That 2018 FMA study found that almost 80 per cent of 18–29-year-olds had a KiwiSaver. Yet they were the group that felt the least knowledgeable and confident about the sharemarket. They almost certainly already owned shares through their KiwiSaver, but that knowledge would probably worry them.

The very first step is to actually put something into your retirement fund. Shocking, I know – but that’s actually the biggest problem with KiwiSaver right now. The people who need it most, aren’t contributing at all.

In September 2017, ANZ released a white paper reviewing how things had gone in the first 10 years of KiwiSaver. Some of the findings were alarming.

Of those lucky guys earning more than $100,000 a year, 80 per cent use KiwiSaver. That means they get the sweet 3 per cent employer match and the nice government tax break of $521 a year. The perks are as close as you get to a free lunch, and the top earners are making good use of it.

Unfortunately, for people earning less than $50,000 a year, ANZ found only 53 per cent of them are using KiwiSaver. The lower earners were also less likely to have independent savings than the high earners. Where my heart breaks for them the most is that they’re missing out on the free employer and government money that they’re entitled to, the cash that could make the difference in actually being able to enjoy retirement, rather than slaving away at low-paying jobs until they drop.

When I talked to ANZ’s managing director of wealth and private bank Craig Mulholland, he agreed it was concerning. ANZ is one of the biggest KiwiSaver providers.

‘There’s a group of people, those on minimum wage, where 3 per cent of what they earn is a lot of money to them. But a little bit can turn into a lot, and it’s important we help people to save whatever it is that they can afford.’

I mean it when I say KiwiSaver is as close as you get to a free lunch. You don’t get many of those in investing, so look after a unicorn when you find it.

You’re not just investing your own money and then earning
a return on it. Your employer will match you, dollar for dollar, up to 3 per cent of your income. That’s free money. Then there’s the tax break, where if you put in at least $1042 per year you get $521 from the government. That’s a 50 per cent return before you even get started. In fact, depending on your salary, by the time you add up your employer match and the government money, you’re doubling your money straight away. And then
you also get investment returns. Insane. This is a sugar-coated retirement savings plan. All you have to do is contribute to it.

I’m not judging anyone who’s struggling to make ends meet and feels like KiwiSaver is in the ‘nice to have’ category. Maybe you genuinely can’t do 3 per cent of your wages to get the full 3 per cent employer match. But even if you can spare just $20 a week to put into KiwiSaver that adds up to $1040 over the year, and just $2 more tips you over the edge to get the entire government tax break. That’s an extra $521 a year before you even get any other returns. It will keep earning and compounding for you from then on. You’ll still be getting part of the employer match and putting away some money for retirement or a first home.

Craig says that even a little bit would be better than nothing. When he crunched the numbers, he found that if you just put in $1042 a year from the age of 25, by the time you retired at age 65 you would have $250,000. Quarter of a million dollars. That’s made up of your contributions, the free money from the government and returns on your investments.

When ANZ researched why people stopped paying into their KiwiSaver, for most, it wasn’t actually grinding poverty that was the problem. They found that 80 per cent of people who stopped their KiwiSaver contributions didn’t start again for five years. That was the full amount of time allowed in the first 10 years of the scheme. Thirty per cent of the people who did that freely admitted they simply forgot to start payments again.

For the average person who stopped paying into KiwiSaver for those five years, they would then be short $37,000 by the time they retired. Remember, they missed out on the beautiful compound interest on that money.

You need to put money into your KiwiSaver or retirement fund. Today. Even if it’s a small amount, even if it feels like it’s not enough. Anything is better than nothing.

The second biggest problem, after those who aren’t contributing at all, is those damn default KiwiSaver funds.

The average person probably does what I did when I signed up as a 19-year-old – they get handed a form at work, fill it out and then proceed to ignore it. That means you get dumped into a default scheme and sit there. The last time I checked the statistics from the Inland Revenue Department in late 2018, it showed just over half a million New Zealanders sitting in a default scheme.

HOT TIP: just $20 a week will get you the full government KiwiSaver contribution, and some employer money. For most people, that’ll double your money.

If you signed up to KiwiSaver, never picked an account and left it at that, you’re in a default account. The problem is that these default schemes were never supposed to be permanent. They are a holding pen, which the government set up so that you had a conservative, safe account to start with while you decided what you actually wanted to do with your retirement savings. There’s not much risk to them, but there’s also very little reward.

There’s half a million Kiwis with their money in there, diligently saving into it with each pay cheque and missing out on the rewards for all of their hard work.

The different types of KiwiSaver funds:

  • Conservative
  • Balanced
  • Growth
  • Aggressive

As a rule of thumb, you can put KiwiSaver funds on a sliding scale; conservative, balanced, growth, and aggressive. At the cautious end, you have conservative. Very safe investments, like cash, that are unlikely to go down in value, but don’t earn you much, either. At the other end is aggressive, where you might go all in on high-growth shares. You’ll make far more money in the long run, but you’ll be all over the place in the meantime.

There’s nothing wrong with a conservative account if you’re, say, saving for a house or about to hit retirement – but you can get conservative accounts that aren’t default accounts. There are plenty of conservative accounts with lower fees and better returns than those default funds.

Your KiwiSaver is a huge investment into your future, with many people building up hundreds of thousands of dollars in there. Why on earth wouldn’t you spend 10 minutes figuring out your options, when it could mean a difference of hundreds of thousands of dollars in your hand?

Well, except, that was exactly me.

That familiar guilty itch had been scratching away in the back of my mind for a couple of years, telling me that something needed to be done about my KiwiSaver. My retirement savings were, indeed, dumped into a default scheme with one of the major banks. I couldn’t even plead ignorance on the issue.
I’d read a couple of years before that, that as a person in my twenties, I should have had the money in a higher growth account. With over 30 years until retirement, I had time on my side, so could reap the rewards of higher risk investments and take a few losses in my stride.

Making changes meant taking the time to do it, and somehow 

it was never really a priority. I comforted myself with the knowledge that I was doing more than the minimum. The least you needed to contribute at that time was 2 per cent of your wages, while I had ticked the box for 4 per cent. Four whole per cent! Problem solved. Never mind that the standard rule is to save at least 10 per cent of your salary, if you want a comfortable retirement. Shh! I’m doing more than the minimum. Now praise me.

What I hadn’t realised was just how badly I was messing it up by continually not bothering to make the change to a higher growth account, something that would cost me nothing, and would mean hundreds of thousands of dollars more when I retired. Literally.

Picking the type of KiwiSaver fund you want is one of the biggest decisions you can make for your retirement.

YOU NEED TO THINK about this decision early on, and don’t postpone this. The whole idea of KiwiSaver is that it’s a long-term investment, therefore to make the decision work you have to make it early on.
Choosing the right fund type is the most important choice in
front of you, and will have the biggest impact on the wealth that you accumulate over your lifetime. After fund type, it’s fees, definitely. But the fund type is the most important, even more than contributions.
Aaron Gilbert – AUT

Again, it's down to compound interest. If you are young and suited for a growth fund, you’ll be earning more in returns each year. These stack on top to earn you even more the next year. Your money snowball is moving at speed.

If you’re in a conservative fund when you shouldn’t be, you’re puttering along in first gear. You won’t stall, sure, but the engine will be straining and whining while you crawl along – or you can move into fifth gear and cruise along to your destination much faster.

There was another factor paralysing me, though. I was scared of making the wrong choice, of not doing due diligence and getting ripped off. I also wasn’t sure how long it would take and who has much spare time these days? Without ever trying, I stuck with the choice that I knew was wrong. How rational.

About seven years into my working life (so much wasted time!) I received an email from the bank, updating me on the growth of my default KiwiSaver scheme. It wasn’t much, as I should have expected, because it was a default conservative scheme.

In a fit of inspiration, I emailed them back asking them if I could change to a higher growth scheme. They answered yes, of course I could, but as email was rather insecure, and we were talking about my retirement fund, I’d need to come into a branch to talk to someone.

Ugh. That sounded like a bit more effort than writing an email and having the issue magically solve itself. I put it off for another couple of months.

But it was top of mind now, so eventually I steeled myself and decided to start with the simplest of internet searches – ‘KiwiSaver scheme comparison’. Maybe one of my colleagues in the business news department would already have done the hard work for me and written about it in an article.

To my surprise, something even better popped up. An interactive quiz from Sorted (fundfinder.sorted.org.nz or smartinvestor.sorted.org.nz), the website run by the Commission for Financial Capability. I’d struck gold on my first try.

I clicked through and answered a couple of questions about how soon I would need the money, and whether a few ups and downs worried me. As I’d expected, they recommended a growth account. They then asked me if I wanted to compare KiwiSaver growth accounts by the return, the services offered, or the fees charged. Just like that, my top choices were displayed.

The Sorted website also gave a breakdown of where the money was invested, which all looked to be in industries that I was comfortable with. No cluster bomb investments for me, personally. I’m okay with most industries, but a girl has to draw the line somewhere.

I knew I wanted a fund that hit the sweet spot between the lowest fees and the highest returns. I found a good one, put the fund provider into Google, and reassuringly found only awards and praise in the news. That was enough for me.

This time, I was allowed to sign up online. I just needed my IRD number and a picture of my ID. It’s amazing how helpful a business can be when they’re poaching you from another provider. Just like that, I was in the growth account I knew I needed to be in.

Seven years. Seven years of being in the wrong fund. For three of them I’d known that I needed to change, but I delayed because I was worried I would make the wrong choice, worried I wouldn’t know where to start, worried it would be too hard.

In the end, I simply made a decision to look, took about 15 minutes on my laptop and a couple of days mulling it over to be sure. Not exactly difficult.

What I hadn’t done yet was work out how much money I’d been throwing away so far. I was about to get a reality check, which would make me relieved that I had made the switch, but mad I hadn’t done it sooner.

After my easy experience with Sorted’s Fund Finder, I decided to call the people behind it. Hey, it had been really useful for me, so I might as well turn it into a podcast. The Commission for Financial Capability offered up Tom Hartmann, who knew the scheme inside out.

To hammer home how big of a mistake I’d made, he crunched the numbers using me as a guinea pig. He took my salary at the time (I’m not putting that into a book I’m afraid, but I promise we crunched the numbers with my real salary), my age (28 at the time) and assumed I would retire at 65.

If I made the minimum payments into a conservative fund, a reasonable best case scenario was that I could have $285,000 when I retired. If I took the exact same money and paid it into a growth fund, that leapt up by $200,000. I could reasonably expect to have a cushion of $485,000 when I retired.

Those are no small potatoes – for the sake of a few clicks at a computer.

Now, you might also be a little worried about making the wrong choice. The way that I chose my fund worked for me, but might not work for you. Luckily, weighing up the various options doesn’t have to be too hard.

First of all, the last time I checked, there were 222 KiwiSaver funds. That’s quite a few to check out on your own, so use Sorted to help you figure out your top five. It’s independent and uses solid data.

You might be tempted to go for a familiar brand, like the bank you use, but there are far more important things you should think about. The fees they charge, the services and information they offer and their track record of returns will be much more important to your wallet. Sorted has pulled all of that information together for you and will let you rank the funds by the best performers on that criteria.

All you have to do is look at it. That’s all your end of the bargain is.

Now, yes, a growth account means that you’re taking on ‘higher risk’, which tends to send people running for the hills. ‘Risk’, in our general life, means something is not a good idea. Avoid.

That’s not necessarily true for investing or thinking about retirement. Risk does mean that, yes, you’re taking a risk. It also means that, if you have enough time up your sleeve, on average you’ll make more money back. You just have to approach it with a long timeframe in mind, say more than five years, and not put all your eggs in one basket.

The problem is many people in KiwiSaver have never invested, so they tend to think of their KiwiSaver account as a savings account that they can watch going up over time. Heck, some banks will even let you put your KiwiSaver balance right next to all of your other bank accounts, so that you can watch your balance climb a smidge higher every day.

Except that your KiwiSaver account isn’t like a savings account. It’s a type of investment fund, which means your money is working harder, trying to make you even more money. Some of it might be in shares, some of it in property, some of it in bonds, all depending on what type of KiwiSaver you signed up to.

That’s all good stuff for your future, but it means your KiwiSaver can go down too. It’s not a bad thing, you just need to be mentally prepared.

AUT finance lecturer Dr Ayesha Scott says a KiwiSaver balance will always go up and down because that’s the normal market cycle. As long as you pick the right fund at the start, you simply wait it out.

You might be noticing a theme here, and, yes, what these experts keep coming back to is that time is one of the biggest considerations for your investment strategy. How soon do you need the money? How long can you bring yourself to leave it? The longer, the better.

I’m young or, at least, in financial terms I’m young. I’m in my early thirties and have bought a house, so can happily whack my money into a growth KiwiSaver account and let it do its thing for another 30 years. I don’t need it. Whereas, different life stages might mean other people need a different approach. Time is everything when it comes to thinking about how you want to invest.

IF I WAS AFTER my money within the next five years, I’m getting close to retirement or I want to buy my first house and that’s what I’m using my KiwiSaver account to do, then I would like to be in a more conservative fund, because five years is perhaps not enough time to ride out a market correction.
More than 10 years is the long term. You have someone like me who is in my early thirties, for me KiwiSaver is a long-term game. I will be saving for my retirement for at least the next 30 to 35 years. I will probably see at least three, maybe four market cycles and corrections while I’m saving for my retirement. For me, it doesn’t actually matter, I don’t mind if the market corrects a little bit, even a lot, because I’m actually going to get more value for money with my contributions.
As long as I keep putting my money away, this will actually mean
I get more for my money over the long term. When the market goes down, I actually feel like I’m investing my money wisely because I’ll benefit more from the upswing. If you’re still buying when the market is down, the value will increase more later.
Of course, if I was in my fifties, it’d be different. Because then I don’t have as much time to wait for the market to go up again after a downturn. Or if you’re using KiwiSaver to save for your first home, again, your time horizon is shorter.
This is the old risk and return relationship, which I teach my first-year finance students. Of course, you want to get returns, but you need to take a little bit of risk to do that.
Dr Ayesha Scott – finance lecturer, AUT

If you have time up your sleeve like Ayesha and I do, the market highs and lows are simply noise that can distract you. It can be easy to look at a dip, see that what you have is worth less now and be worried, but both the highs and the lows are a very good thing for your investing future. I mean it – you need the lows.

What Ayesha is saying is that the highs are when you make the money, which is all very nice. But the lows are when you buy investments cheaply, so that you can make that money later. You can’t have one without the other. That’s the whole point.

Don’t panic when things go down. It’s great for future you. You’re just going sale shopping, as long as you have the time to wait for things to bounce back.

Of course, even in your fifties, you might not plan to use your investing money for another 20 years. So you need to know that time is the biggest factor, and that it’s your personal timeline that you should be thinking about. You need discipline, but you also need to be honest with yourself.

Ayesha says this is where people get confused about the sharemarket being more volatile. Sure, it’s up and down in the short term, but over the longer term, the line between those points steadily goes upwards. You need to think about what’s right for you, and then get the most money for your situation.

She says if you go for the longer-term options, you need to remember not to panic if things start to go down. If you yank everything out when the market goes down, you’ve just turned this into a short-term strategy. It needs to sit there long term, if that’s what you’ve picked to do.

THE WORST THING YOU can do, if the market dips, is to sell. You’re selling off your assets cheaply. Sharemarket fluctuations don’t actually mean anything unless you’re buying or selling. If you’re just holding on to those assets, those ups and downs don’t matter. It’s not until you sell out of an asset that you actually crystallise, or realise, any loss or gain. So your KiwiSaver balance might go up and down, but that is something that just exists on paper.
You need to engage with your KiwiSaver, but please realise that engaging in the process is choosing the correct fund type and how much you put into it. It is not switching and changing the risk levels with market cycles, because that is a sure-fire way to lose out on returns and crystallise losses. You only need to look at it every few years, unless there are some major changes in your own life.
Dr Ayesha Scott – AUT

Nobody likes to feel like they’re losing money, but you’re not. Once I understood that was how it worked, I was ready to grit my teeth and look away when things got grisly out there.

Now, you could decide that this means shares are not for you. The very thought of all this might make you nauseous, and we always have to keep the human factor in mind. You might even decide you want to change your KiwiSaver scheme, so that it can’t be affected by the sharemarket. That’s totally your choice, and maybe something like a term deposit is better for you. It’s not going to have the same volatility, but you’re also not going to get the same return on your money. Personally, I’ll grit my teeth and take the cash, thanks.

Jose George, general manager at Canstar, an independent financial research group, is another person who spends time researching the market, and looking for trends to help you and me out. He put it well when he told me that risk was ‘absolutely not’ something to be scared of, but just another term to understand.

IF YOU TAKE MORE risks in life, there are potential chances that you could fail, but there are bigger opportunities for you to gain as well. But if we’re talking specifically about KiwiSaver, then that’s different. The probability of losing your money completely is really, really low, because there are strict rules that mean you’re in a well-managed, structured investment. Even a bank deposit is not without risk. But it’s really at the lowest end of the risk spectrum, so also, at the lowest end of returns.
Jose George – general manager, Canstar

You need to figure out what level of risk you’re okay with, and what level of return you want for your future. Then the next thing to keep an eye on is fees.

AUT finance professor Bart Frijns has crunched the numbers on fees. The result is a scary warning about KiwiSaver fees in particular, although if you’re looking at investing in any type of managed fund or index fund, the same advice is true.

You get charged a fee any time you invest in shares. Fees can be big or small, but you always need some type of middle man to get you into shares and they charge you a bit for the privilege.

I talk about the how and why of that in more detail in the next chapter, but for now, you just need to understand how they impact your KiwiSaver. If you don’t, it could be like letting a golden retriever take a lick of an ice cream. It’s never just a lick – they’ll take most of it for themselves.

Bart worked out that, for the average person, a fee of just 1.5 per cent over a 40-year period would suck away 20 per cent of the profits you would have earned otherwise. That’s the power of compounding in action; you not only pay that money from your retirement fund, you lose everything that money would have earned you over time. Suddenly, that fee is looking a lot more meaningful, right?

He says people often assume that you get what you pay for, yet research shows high fees don’t lead to high returns. Even worse, his research showed there was almost no relationship between the fees you paid, and the performance you got. Your odds are just as good with the cheap accounts.

He published some of this research in 2014, with his colleague Alireza Tourani-Rad. They found that KiwiSaver fees were far higher than international standards, and there was no extra performance to show for it. So it’s worth making sure you check what you’re paying. Nobody likes being ripped off.

AUT Associate Professor of Finance Aaron Gilbert says there’s a wide range of fees charged in New Zealand, from 0.3 per cent up to almost 2 per cent. Those bigger fees can be a retirement killer. ‘The real kicker isn’t the fact they’ve taken the fee out, it’s that the money then isn’t earning anything in the next period. A big part of the fees issue is actually the lost opportunity for compounding.’

Again, the ‘get what you pay for’ myth comes up. When I asked Aaron about it, he let out an exasperated laugh. ‘People assume that if you pay more you get better service. And if
you have complicated decisions to make, and you don’t really understand what you’re doing, it’s an easy psychological shortcut. Because quality costs, right? No.

‘Some of the worst performing funds over the last ten years have been the most expensive. Whereas the passive funds, they might not be number one in the league tables, not at first. But when they’re consistently in the middle of the pack, and saving you big time in fees, then you’re way ahead in terms of what you get in the hand.’

To recap: you can have conservative, balanced, growth or aggressive KiwiSaver funds, but any of those can also be active or passive. Conservative, etc. describe the type of things you invest in. Passive/active is talking about the strategy you take while investing in them. For instance, I am young, but also
lazy, and I only pay for something if it’s definitely bringing me results. As such, I like an aggressive investing strategy with lots of shares, but in a passive fund where I’m not paying a person to make lots of extra decisions that cost me money without bringing extra results.

Our Canstar friend, Jose George, agrees with the fees warning. He even went a step further, pointing out that the return you get can vary on any given year depending on what’s happening in the market at that point. Yet the fees are one of the few things that are totally concrete and certain when you pick a KiwiSaver provider. There’s an argument for looking at fees first, and returns second.

‘These days, at Canstar we judge it based on “performance net of fees”, so how much is your return once the fees are taken out. That’s really important, because at the end of the day it’s pointless having a headline return number, if the fees eat most of the return.’

Compounding. It makes your investment returns stronger, it makes the impact of debt worse and it also makes the impact of fees worse. You can’t control everything when you’re investing. In fact, most of my investing strategies are built on exactly that – I can’t control the market, can’t control other investors, so I won’t even try.

You can control fees. Fees are one of the few fixed costs in investing. Returns aren’t guaranteed, but fees are. Get those fees down, so that any profits come to you, not someone else. Then the money you’ve kept through saved fees will keep on compounding and earning you more. Over 20 years, you’re going to be very happy that fee money kept working for you instead of someone else.

If that’s all getting a bit overwhelming, then just remember the bottom line. The single biggest difference for your KiwiSaver future is in actively picking a conservative, growth or aggressive fund. It outweighs just about everything else. And it costs you nothing.

For all of the talk about embracing risk for a bigger return, there are still situations where a conservative account will be best. If you’ve looked into it and decided that’s what works for you, that’s great. It really might be best for you, whether that’s because you want to buy a house soon, you’re retiring soon or you simply don’t have the appetite for risk that comes with a higher return.

But half a million New Zealanders sticking with the default accounts suggests that they haven’t thought about it at all, or they don’t realise that they’re throwing so much money away. All for the sake of a few clicks at their computer.

It pains me to think of people who are simply unaware of the issue, or who hear ‘risk’ and shut down without understanding what it means for investments. Imagine carefully stashing your money away with each pay day, thinking that you’re doing the right thing. Then it barely grows and when retirement comes, you still have to scrimp and save. When you could have saved the exact same money, put it into a growth account and had a cushy retirement.

If the idea of struggling through your twilight years scares you, then good. Don’t think you can just rely on the pension and you’ll be fine.

For starters, who knows what future governments will do to the pension? There’s mounting pressure for the retirement age to be increased, or for the amount to be cut back. It’s basically a matter of time before one government or another gives in to that.

But even if nothing changes, just the pension isn’t enough right now. In New Zealand, if you’re single, you get around $20,000 a year. If you’re a couple, you get around $30,000 a year between both of you.

The situation gets especially bad if you haven’t been able to buy a house and pay off the mortgage before retirement. Given the current housing situation, I wouldn’t blame you if that was the case. But it would mean you could blow your entire pension just keeping a rented roof over your head. If you haven’t taken care of KiwiSaver, what will you eat?

Some of this can seem daunting at first glance, but once you’ve figured out a couple of rules of thumb, it’s honestly not. I took the first step, even though I felt out of my depth, and then the one after that. It wasn’t hard, as it turns out. After all, how do you eat an elephant? One bite at a time.

I knowingly held myself back from three years of stronger returns just because I felt unqualified to even look at it. Don’t do that.


Tales from a Financial Hot Mess Frances Cook

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