KiwiSaver is not a ‘set and forget’ investment, yet the majority of people treat it as such. There are key decisions to be made along the way which can make the difference between living in comfort or living in misery in retirement. Despite KiwiSaver having been around since 2007, the level of understanding of how to make the most of it is low.
One of the most fundamental mistakes is a belief that you have to be a paid employee to be able to contribute to KiwiSaver. If you are self-employed, or not employed at all, you are able to join and contribute to KiwiSaver. Just choose a scheme and make contributions directly to the provider, preferably by monthly direct debit so you don’t forget. If you have taken a break from work, for example to have a family, you can still make contributions directly into your fund. It’s important to keep contributions going if you can, so you don’t fall behind with your retirement savings.
Investing in KiwiSaver involves two key decisions – choosing a fund manager, and choosing an investment option within the range of funds offered by the manager. If you don’t make these choices, you will be put into a default fund which may not be the best option for you.
It’s a big mistake to compare fund managers simply on fees. Fund performance after fees is what counts. KiwiSaver funds are invested in a mixture of cash, fixed interest, property and shares. Fund performance will be determined mostly by the weighting given to each of these investment types and it is a mistake to compare the performance of fund managers by comparing funds that have very different weightings. Even funds with the same name, such as Balanced funds, may not be comparable because their weightings are different. When you are making choices, don’t make the mistake of assuming that future returns will be similar to past returns. Look for consistent performance rather than picking last year’s winner.
Chasing high returns without considering risk can lead to unfortunate outcomes for people with a short investment time frame or a low tolerance for risk. On the other hand, many KiwiSavers make the mistake of being too conservative with their investment. Over the long term, a conservatively invested fund is likely to generate much lower returns than a fund with higher weightings to property and shares. A mistaken belief that your investment time frame finishes the day you turn sixty-five leads many people to an investment strategy that is too conservative. Your investment term ends the day you withdraw your last dollar to spend it. If you have managed your money effectively, this should be somewhere near the end of life, not the end of your working life.
While it is important to save for your retirement, it’s even more important to pay off your mortgage and other debts as quickly as possible. Increasing your KiwiSaver contributions beyond what is needed to get your maximum tax credit is not necessarily the best thing to do if you still have debt. It can be a mistake to have all your retirement savings in a fund that is locked in until you reach retirement age. There are other diversified funds available which are not locked in, so you can access your money quickly if your circumstances change,
When you retire, you can continue to use KiwiSaver to manage your retirement nest egg by just taking out money when you need it. If you made the mistake of closing your account when you retired, all is not lost. People over the age of sixty-five are able to join or rejoin KiwiSaver. You won’t get tax credits and you may or may not get an employer contribution if you are still working (it is optional for employers) but KiwiSaver is still a useful vehicle for investing retirement funds, especially for the medium and long term.
Perhaps the biggest mistake to be made with KiwiSaver is not getting advice on your choice of fund and contribution level, both of which may need to change over time. Being in the wrong fund for a long time can cost you tens of thousands of dollars – far more than the cost of advice.
