Being a slacker about your finances is rarely a good idea. If you are thinking about using your KiwiSaver funds as a deposit for your first house, you’ll need to be proactive.
The Government’s announcement that from June next year the default KiwiSaver fund settings will change from ‘conservative’ to ‘balanced’ is good news for long-term savers.
According to the Sorted website, a 20-year-old starting on a salary of $40,000, contributing at 3 percent, plus employers’ 3 percent, with annual pay rises of 3.5 percent, will be more than $100,000 better off at age 65 in a balanced KiwiSaver fund than a conservative one.
That’s a big difference. Which is why the main reaction from financial commentators to the Government’s decision has been “about bloody time”.
But the situation could be very different for people who are not planning to hold their KiwiSaver money until retirement, but instead to spend it within the next five or so years as a deposit for their first house.
The difference is in the timeframe. Long term, if you keep squirrelling your money away steadily for years, you are going to end up with increasingly more money than you put in. It’s the miracle of compound interest – something Einstein reputedly called the most powerful force in the universe.
Putting your money into a fund with more risk and therefore potentially higher returns (a “balanced” or “growth” KiwiSaver fund as opposed to a “conservative” or “defensive” fund) means the fund should grow quicker.
Think of your savings like a snowball. The bigger your snowball gets, the more it increases in size when you roll it.
Risk and reward – or not
The trouble with riskier investments – shares and property, for example – is they are also more susceptible to economic blips. Downturns, corrections, financial crises, and full-blown crashes. And while markets will bounce back in the long term, meaning KiwiSaver funds heavy in equities and property will go up again, anyone who needs to get their money out quickly – to put a deposit down on a house they have fallen in love with, for example – could end up getting less money out in a balanced fund than if they’d been in a more risk-averse one.
“Conservative funds are generally suited to those who plan to withdraw funds within the next two to six years,” says the Canstar financial product rating site.
“Balanced funds take a slightly more aggressive approach to investment. They hold more stocks and shares, up to around 60 percent, and seek mid-range, long-term returns. They are for people who don’t foresee accessing their funds for over a decade and are happy with slight wobbles in the value of their account on its rise upwards.”
Head in the sand
Obviously, the answer is to choose the right fund. Trouble is, more than 400,000 New Zealanders don’t. Of the almost 700,000 people in default funds (nearly 25 percent of the 2.9 million people with KiwiSaver funds), more than half haven’t made an active choice.
Whether it’s through inertia, procrastination, lack of financial capability when it comes to complex financial decisions, or an assumption the default is endorsed by the government, they just stay in whichever of the nine default funds they were put in when they got their new job.
But that doesn’t mean they aren’t going to want to use their KiwiSaver funds when they come to buy their first house.
The Financial Markets Authority 2019 KiwiSaver report shows last year first home buyers took out almost as much of their KiwiSaver funds as people over 65 – $953 million as against $1.04 billion.
And the number of first home buyer-related KiwiSaver withdrawals grew significantly last year – up 32 percent on 2018.
Stock markets are seen as overvalued in many parts of the world, with companies reporting earnings falls, and worries about the economic impact of the coronavirus and the US trade war with China.
“Anyone wanting to use their money in the short term might find it more appropriate to pull back into a conservative fund,” says Tom Hartmann, managing editor for the Commission for Financial Capability. “Everyone needs to be active.”
But engaging people in default funds around their KiwiSaver is easier said than done, says Richard Klipin, CEO of the Financial Services Council. “The sector is spending a lot of time and money to engage with young people when they start a job. But it’s difficult.”
Joe Bishop, chief customer officer for KiwiSaver provider Kiwi Wealth, says there is “deep-rooted inaction” among some members.
Kiwi Wealth call centre staff have to resort to phoning default KiwiSaver members in the evenings and weekends, he says.
“Our experience is direct personal telephone contact is the best way for motivating people to make an active decision about their default fund.”
Although the Government’s move from conservative to balanced default settings should benefit anyone holding on to their KiwiSaver funds until retirement, it could leave first home buyers in a less-than-ideal situation.
“There is no perfect solution here,” says Sam Stubbs, managing director of KiwiSaver provider Simplicity. “The Government has taken the simplest approach to achieve the most good for the most people.”
Peter Stevens, spokesman for Consumer Affairs Minister Kris Faafoi, agrees. And he says there are safeguards. The changes include the Government putting more pressure on default providers to engage with their members to help them make informed decisions about their retirement savings.
Meanwhile, anyone with KiwiSaver funds that might be affected by the changes “will be contacted well in advance of the change and be given a further opportunity to opt out”, Stevens says.
People thinking about using their KiwiSaver to buy a first home are also less likely to have their heads in the sand, he says.
“Most are more engaged with their KiwiSaver and are likely to have already thought about what fund type is right for them.”
While staying in a balanced fund could lead to a moderate increase in risk for prospective first home buyers, it could also improve their expected return, increasing their contribution to the purchase of their first home.
And while there is no downturn, first home buyers will benefit from being in a balanced rather than a conservative fund, he says.
“While staying in a balanced fund could lead to a moderate increase in risk for prospective first home buyers, it could also improve their expected return, increasing their contribution to the purchase of their first home.”
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