Lack of knowledge means many KiwiSaver members are making poor decisions on key aspects of their funds. As time goes by and balances grow bigger, there will be a widening gap between those who have made good choices and those who haven’t. Here are the top five mistakes to avoid:
Leaving KiwiSaver money in a default fund
Employees who are automatically enrolled in KiwiSaver on starting a new job are randomly allocated to a ‘default’ provider until such time as they decide which provider they wish to invest with. However, a large proportion of these KiwiSaver members never get around to making that decision. When a default allocation is made, contributions go into a conservative fund which is low risk but also low return. Over the last five years, the average annual returns from conservative funds have been around half the returns of aggressive funds.
Making a choice but choosing the wrong fund
KiwiSaver providers offer a range of investment choices based on different levels of exposure to growth and income assets. A conservative fund will be invested mostly in income assets (cash and fixed interest), while an aggressive fund will be mostly invested in growth assets (property and shares). A balanced fund will be a roughly equal combination of income and growth assets. In between there may be a moderate fund and a growth fund. The choice of fund should be primarily based on your investment time frame. This is the time within which you intend to spend your KiwiSaver funds, which in most cases will be when using the funds to buy a first home or some time after retirement age. The shorter the time frame, the more conservatively the funds should be invested to reduce risk, while for longer time frames a high exposure to growth assets is preferable to achieve a higher return. A first home buyer intending to withdraw funds within five years may risk the loss of a drop in the value of their investments by investing in a growth or aggressive fund. After purchasing a first home, young investors will have a long investment time frame which is best suited to a growth or aggressive fund.
Choosing a provider before an investment option
The risk and return of a KiwiSaver fund over time is more closely linked to its asset allocation (the split between income and growth assets) than to the choice of provider. The first investment decision to make is whether to invest in a conservative, balanced or aggressive fund (or somewhere in between) and then to compare different providers for the chosen investment option. That way you get to compare apples with something closely resembling apples. Choosing a provider is not about looking at who has the lowest fees. There is nothing wrong with paying higher fees if the provider delivers consistently higher net returns after fees. While a provider’s past performance is an important part of an investment decision, it is no indication of future performance. This year’s leading performer may well be next year’s laggard.
Contributing too much or too little
The optimum amount to contribute to KiwiSaver is $1,042 a year which will entitle you to the maximum tax credit of $521. If your income is low or you work part time you may need to contribute a higher percentage of your pay or make a top-up payment each June to avoid missing out. Contributions of more than $1,042 or 3% of your pay (whichever is the greater) do not attract extra benefits and it makes sense to add to retirement savings by investing in similar products which are not locked in.
Cashing up KiwiSaver on retirement
KiwiSaver can be a cost effective and accessible form of investment for retirement. There is no need to cash it up. Leaving all your money in bank deposits for a thirty year retirement is an unnecessarily conservative approach and KiwiSaver funds offer the ability to remain diversified with exposure to growth assets. Smaller KiwiSaver balances can be left invested for the long term to provide for costs in the last stage of life, including surgery, in-home care or rest home care, or as a just-in-case fund in the event that you live longer than expected. An alternative approach is to invest KiwiSaver proceeds in an annuity that will provide an income for life.
KiwiSaver is a great way to save for retirement. Make sure you get the best from it by avoiding these common mistakes.
