The crazy thing about retirement is that the best time to think, and plan for it, is when you're young.
Ironically, when you're young, you think you're going to live forever and the very idea of 'retiring' is repugnant because it's another word for getting old. As a consequence, most people fail to plan when they should and therefore lose the opportunity to get on top of it when they are in their 20s and 30s.
If we hope to get a future generation ready for retirement, I think we need another word for retirement that encapsulates a far more attractive idea.
I also think we also need to de-stigmatise ageing by portraying more positive images and stories of people past retirement age because increasingly many choose to work past 65 because they want to, not need to.
This past week on Smart Money we talked retirement readiness and heard plenty of good examples.
One caller worked as a chef his whole life but returned to the kitchen to earn a bit of cash washing dishes. Having worked in a restaurant myself back in high school, I know the pecking order of this business and washing up was the least glamorous position of all. So going from being the chef to chief bottle washer must come with a fair bit of humility. You could tell this fellow was egoless in that regard.
As well as getting him out of the house, he enjoyed the socialising with younger folks, the residual health benefits of being more active. The payment was almost a bonus.
Another was a retired teacher who went back to do some relief teaching. He said it afforded him trips back home annually to the United States but you could also sense the buzz he got from being around younger people and being useful.
Another chap, who drove a truck for a living, came back out of retirement to earn a bit of money after having suffered a stroke. He'd conceived a plan to sell the family home and retire more affordably, in Thailand! How awesome is that?
These kind of stories may come as a relief to those in their 50s or 60s who are panic stricken about their lack of prepardedness. Sure, retirement seems the best thing in the world when you hate your job but if you find something you enjoy doing, and get a lot back from it, not dropping tools at 65 to stay home may seem less daunting.
On the other hand, if you are determined to stop trading your time for money by age 50, or earlier so you can travel the world, you're going to need a shrewd plan to get there. The FIRE (financial independence retire early movement) was all the rage a decade ago and still has a strong following. It was popularised by the Canadian-born engineer turned blogger Mr Money Moustache, who extolled the benefits of biking, fixing and making your own stuff and eschewed consumerism and wasting money.
His no-nonsense methods put him on the path of early retirement and inspired of personal finance fans to follow suit.
He was/is a talented writer and his methodology a sound one too. Mr Money Moustached proved that you don't have to be born-rich, a tech-entrepreneur-turned billionaire, or an early adopter of Bitcoin to stop paid employment.
If you're a determined individual, with discipline, a plan and some consistency, you can move mountains in most area of your life.
Where money is concerned, the vast majority of people are simply not awake to what it is they want to achieve, and how their daily habits and choices are shaping their reality. Unfortunately, the wake up call comes some time around 40 or later when you start feeling weary and then turn your mind to the retirement issue.
At that stage, if you haven't planned, it can be ugly. All the more so with interest rates being so high, and the cost of living too!
A simple plan to avoiding this horror is doing some basic work early on.
Decide when you would like to give up paid employment and calculate how much you think you would need to live off. Run two sets of number; one that includes NZ Super or your government pension if you are domiciled in another country and one that doesn't. Factor in inflation too.
Look at current savings balance in KiwiSaver, or with whatever investments you currently have. If you don't have a workplace retirement savings investment, consider opening one smartly. Most providers have projection tools which show you how much you're on track to have by retirement age. Read the assumptions because they are also important. They include things like; your fund type, your tax rate, your level of contribution and time frame. Most of these tools tell you what you can expect to have per week as a result of your current investment strategy from age of retirement till 90 or so.
In most instances, the exercise above will elicit gasps of horror when you realise how far you have to go to bridge the gap. DON'T panic. If you have any wiggle room in your budget, consider increasingly your contribution rate and see what impact that will have on the 'terminal' amount. You can also think about cutting back on other expenses to increase your savings, take on other types of work (side hussles), reinvest in yourself to study or train at something you may enjoy better or earns you more money, both preferably.
Take comfort from the true stories of some of the folks above who are working in their '70s and getting a lot more out of it than simply money.
How to find out if you're invested in Silicon Valley Bank and Credit Suisse via your KiwiSaver provider
The latest financial blow-up involving Silicon Valley Bank (SVB), and the contagion of Credit Suisse, have likely had one of two responses: “SVB who?”, Or :”Which one is next and am I invested in it?"
If your reaction was the first, read Matt Levin’s excellent piece here in Bloomberg. If the latter, read on.
Levels of panic depend on whether you're a depositor or a shareholder in the banks that go bust or are at risk of going bust.
To stem a full-on banking sector melt-down, Governments are leaning in with guarantees that retail deposits are safe, well to a certain amount anyway. They do this to comfort retail investors who have comfortable size term deposits and the like to prevent a mass exodus. The greater fear lies with shareholders who aren't likely to benefit from any Government bail-out.
Before you heave a sigh of relief about not being a shareholder in any American banks, or Credit Suisse, take a beat.
If you’re a New Zealander, chances are you have a KiwiSaver account. More than 3 million people do. The majority are invested in Growth funds, which tend to have a broader exposure to sharemarkets around the world, including Switzerland and of course America.
So despite being at the bottom of the world, when it comes to diversified share portfolios, it is a small world indeed. There is a good chance you do have exposure to both SVB and Credit Suisse.
The good news is, it's not likely much.
The average balance in KiwiSaver is around $30k. And when you breakdown all the investments you hold around the world, your exposure to any single stock (unless it is in the Top 10 holdings) is likely to be miniscule.
On a balance of $30k if you're invested in the S&P500, its around $11.
On a balance of $100k for example, it's around $36. In other words, it is not going to throw off your retirement. This is the benefit of being invested in a wide range of companies, across a wide range of countries.
The lesson here for investors is to start caring, more, about what they're invested in.
I will hazard a guess that 98% wouldn't have a clue.
It’s a bit harsh but consider the fact that close to 40% of savers don't make regular contributions into their accounts. KiwiSaver is an investment vehicle engineered specifically for your retirement. You need to make regular contributions to optimise what you'll have for retirement.
Step by Step
Before we go forward, let's take a step back.
If you want to understand better what you’re invested in, firstly you need to know your fund type.
If you don’t already know, log into your KiwiSaver account. If you're invested in other funds outside of KiwiSaver, I expect your understanding (overall) will be better. If you don’t who your provider is, phone Inland Revenue or try logging into your MyIR account online. You'll find it under the KiwiSaver tab.
Once you know with whom and what fund you’re invested in, you can look at the composition of that fund on your provider’s website. Regardless of who you’re invested with, all of them will have a Fund Update page, usually it is alongside the Fund type you’re in.
This is an example below with reference to Simplicity KiwiSaver.
Navigate to the page that outlines the different fund types and find your fund. There will find a risk indicator rating.
This indicates the level of risk you face given your fund type with 7 being the highest and 1 being the lowest.
Generally speaking, the more shares you have in your fund, the higher the risk.
The risk is higher because the share market has a lot of volatility.
Regardless of your level of expertise, you’ll have some appreciation for this after all the covid aftershocks and the rise and fall of your balance.
Underneath the fund’s description, you’ll see the first year return. Don’t panic if you see a negative numbers. It has been a horrible year in the markets and most providers will be posting a negative one year return at this stage. To cheer yourself up, look at the return p.a. since inception. There you will see a happier story, unless you only joined KiwiSaver recently.
Underneath the return, you’ll see a pie chart. This breaks down the types of assets you’re invested in.
In this case it breakdown as follows:
The key difference between a Conservative Fund and a Growth Fund is the ratio of income assets (cash and fixed interest) to growth assets (shares and increasingly other assets like Private Equity holdings - more on that in a later blog).)
These are great documents to read. It’ll explain all of the above in greater detail.
It’ll also show you how your fund fared, compared to the benchmark that it uses to compare performance.
“The market index annual return is a composite index, calculated using the return of each asset class index the fund invests in, weighted by the fund’s benchmark asset allocation."
Okay so these are broad brush strokes.
For the real juicy details, i.e. are you invested in Credit Suisse or SVB, you’ll need to look at the holdings of your fund. The fund update will show you a provide of the top 10, but you’ll want to go deeper than that for the rest. With Simplicity's diversified funds, you're invested in 3,000 shares spread across 23 countries so SVB won't be in the Top 10. If it was, you'd be worried.
You can find the entire holdings on the Companies Offices disclose register. Search your provider and fund type.
Your fund manager, if asked, should provide you with the complete holdings. It may also be on their website if you did a big of digging.
With Simplicity, you have total transparency via a cool tool called Where in the World is My Money. If you enter your balanced and the fund type you’re in, you can find out to the dollar what shares, bonds and other assets you own.
Users will be reassure how well diversified they are.
It is an age old adage, but diversification really is one of the best ways to mitigate risk when it comes to investment. Imagine you were only invested in US bank stocks for instance and there was a huge run on banks there. As an investor, you'd be in shocked.
Property is another good example where diversification should be considered. Let's take Christchurch as an example. Say you were only invested in property located in Christchurch in 2010. I'm willing to bet many investors learned the hard way, not to put all their eggs in the property basket after that year.
Risk is all around us. Understanding what the risks are with your investments means you can either sleep better at night or potentially enjoy a higher standard of living in retirement. Of course there are no guarantees, but it pays to know either way.
The information contained above is purely informational and should not be construed as personalised financial advice. For personalised advice, I recommend you seek a fee charging financial advisor.
Remember the Spark Joy phenomenon?
The term was coined by minimalist Marie Kondo, who devised an inspired system for decluttering closets, transforming mountains of messy clothes and other junk into a Zen-like temple of tranquillity and order.
My mother-in-law was an early adopter. She bought the book, copies for grandkids, and worked Kondo cleaning rituals like an exorcism. She was a quick study.
She was eager to show me her magic when I visited for a Sunday meal. She had managed to origami her undies into domino lines of perfection in the sacred drawer. The arrangement starkly contrasted my lucky dip drawer of disorder at home.
It has been a few years since the Kondo craze, but on a rain-induced folding frenzy the other day, it got me thinking about how to KonMari your finances. Could a similar system be adapted to bring some Spark Joy in the form of financial well-being?
Unlike my undie drawer, my finances are well structured. Ironically, they follow a system not dissimilar to the Japanese declutter goddess's.
Here’s the financial overlay on Kondo’s five steps regime. See for yourself how well it works.
An organised closet is beautiful to behold, but those Kondo standards can be tricky to maintain. Even Kondo herself admits she's taken a more relaxed approach recently.
Because my partner is a bit OCD, his side of the closet makes mine look bad by comparison, so I do attempt to KonMari at times. But those freshly pressed shirts have nothing on my financial Spark Joy.
The information above is not personalised financial advice and the opinions expressed are mine alone. Should you require financial advice, I recommend you seek a fee paying financial advisor.
One of the first riddles I learned as a small child was the chicken or egg quandary.
It did my head in trying to crack that one.
The relationship between the mind and money is also somewhat circular.
What came first, the right mindset or the money?
You'll have plenty of examples on either side of the ledger I'm sure but it is an interesting debate.
For those fortunate enough to be born into wealth, money came first naturally. But just because someone is rich at birth doesn't assure them a good relationship with money ,or a guaranteed supply of it either.
And regardless of whether you made it, or inherited it, wealth needs a healthy mind to manage it properly.
I'll never forget the scene in "All The Money In the World," documenting the life of Jean Paul Getty senior. At one time, America's wealthiest man, Getty was apparently so thrifty he would wash his own undies in a hotel sink to save a buck. Notoriously, he did not pay the ransom when his grandson was kidnapped.
It's an extreme example, but it underscores how the mind can delude itself where money is concerned.
Research has found that folks living in wealthier postal districts give less money to charity, than those of more modest means suggesting that the richer you become, the less generous of pocket.
With today's cost of living, and mortgage rates tripling for some, the financial pain of 2023 is not exaggerated. But wishing one's financial situation was better than it is, without doing something differently, is unlikely to make a difference.
However, seeing your situation from a different angle and forming a plan of action will.
It starts with having mental clarity and then a road map.
Sadly far too many people become paralysed by their finances. They either fail to do anything at all or make matters worse for themselves by pretending things are different than they are. Neither is helpful.
In the gripes of a financial crisis, what you need first and foremost is a clear mind and then a clean slate to set a new course.
The mind needs to be cleansed of fear, anxiety and generally unhelpful thoughts to find a way forward. It may not be easy, but it's far better than freaking out.
This is where mind-calming techniques like meditation or slow, steady breathing come into hand.
When practised with some regularity, both have the effect of taming that monkey mind.
Both work on a physiological level overriding the fight or flight mode that we haven't evolved out of yet. When the body relaxes, the mental mind fog also lifts.
It can alter how you perceive your external world, and teach you to become more responsive and less reactive.
Regular meditators will know from experience the positive benefits of having that clarity and calmness of mind across all areas of life.
Don't get me wrong, you can do some fundamental things with money that result in better financial outcomes that don't take meditation or psychoanalysis.
They include simply not spending more than you earn, automating your savings, understanding the actual cost of debt, avoiding it where possible and tracking your spending more mindfully.
But for those more perplexing financial situations, and more ambitious goals having greater mastery over one's mind is key.
I could start with another New Year, New You personal finance post, but I won't.
That is well-trodden territory; if you're honest with yourself, you will know the answers.
If not, very quickly, here's a reminder to:
Instead, indulge me in a rant about the finance industry and others who are currently inadvertently perpetuating the myth about the weak, stupid little woman.
If I have to read another column written by a white middle age man, dispensing cliches from his mother or grannie, about coupon clipping, baking their own bread, and 'you can do it girlie' fist-pumping propaganda, I'll puke.
I get there are good intentions behind all this, about wanting better outcomes for women, but I can't help but be cynical about the current approach.
It's all well and good to preach money 101 basics to gals, ostensibly because you want them to achieve higher savings, but the narrative at the moment seems built on the assumption that women don't know there are financial inequities that could impair their financial wellbeing and don't know how to fix it. Extra cynically, those players piling into this female empowerment space are seeking to win over and build their female client base.
There is a zinger of a speech that actress Reese Witherspoon, an accomplished actor and producer, gives at an award ceremony that takes aim at the same issue. In it, she describes how far too many Hollywood movies feature a scared and helpless female who turns to the firm and stable male and cries, "What do we do now?!"
Ask any woman whose been lost with her partner in a foreign country, dealt with an errant child, had a broken-down car, or dealt with virtually any crisis, and you'll know that the Hollywood myth is bullshit.
These pathetic stereotypes about women do not match today's reality. They probably never did, but women have not had the same chance to record their history or stories as men.
In my world, most of the women I know are financial powerhouses. Whether single or partnered, they are the money managers in the household, and I'm not talking about paying the bills and buying food. I'm talking about investments across all asset classes.
Much of the talk around women and money currently centres around women not having as much as men in their KiwiSaver accounts. The inference is that women don't know this; they don't understand why they should care and don't know how to fix it. It is also commonly assumed they lack the confidence to deal with money beyond managing household accounts.
I have no doubt some women may fit this profile, but if I'm honest, I know more males than females who fall into that category and rely on their female counterparts to play the CFO in the family.
Both of my grandmothers controlled the family finances AND the investments. My late mother, who managed her own finances as a single working mother, was far savvier about investments than any fund manager or financial advisor I know, warning me about unjustified investment fees back in the '80s when I was in high school. She retired more than just well.
Still, there was this assumption by those who met my mother for the first time that she must have inherited her wealth or received some cash windfall in a divorce, or was supported by a partner.
I'm not sure my mom would describe herself as a feminist, but by most traditional definitions, she was. Financially independent, self-directed, wise and career driven, she had total confidence and control of her finances. That was my role model growing up, so maybe that has shaped my thinking and behaviour around money. My mom didn't buy Barbie Dolls or bake cookies for my sister and me when we were kids. She worked in a male-dominated industry with a title she held until she retired as a "Landman." She negotiated land deals for a living and was very good at helping buyers and sellers reach their targets.
I never met another woman who did what my mother did for a living (or matched her capabilities in so many areas). Still, I have known numerous professional women like her.
My tribe may be unique in that sense but what steams my bean about the current narrative is that instead of looking through the lens of women who are not languishing in debt and spending all their disposable income on hair, nails and high heels, we talk about women as though they are helpless financial illiterates.
Just because women's savings in KiwiSaver are lower, we should not infer incompetence or ignorance with money. In most cases, the disparity is directly attributable to lower pay or likely workplace absences for the purposes of rearing children. The financially savvy female will know they should contribute at least $1,043 a year (even if they have left the workforce) to receive the $521 in free Government support. They will also be acutely aware of their savings shortfall while not working full-time.
The difficulty for most women, at least those working women who decide to have children, will be balancing a career and motherhood and trying to excel at both. This, in my experience, is not the same burden (yes, there will be exceptions) as men who have the luxury of pursuing (unbridled by guilt) their careers. At the same time, the working mother typically organises play dates, sports, after-school programmes and tutoring, birthday parties and gift buying whilst remembering to do the shopping, keep the house in some semblance of order and do a good nay great job at work too. That is the challenging piece for intelligent women, not any deficiency in their intelligence or ability when investing their money.
It is time to spin a new narrative around women and money, address the pay inequities that are the real barriers to equality in financial well-being and make it easier for women to balance work and raising a family (i.e. subsidised child care) so they can get on with building wealth on par with their male equivalents.
And please, let's bury the helpless female myth once and for all. Women know what to do. Let's create an equal playing field to allow them to do so.
The plight of the single parent...where do I start?!
Your assets are halved, your household income savaged, both made worse by your ability - or lack thereof - to work unless you have free, or highly subsidised childcare. Throw in the stress of separation, the emotional aftermath of a bitter ex, and now the crushingly high cost of living issues, and it is no wonder New Zealand's collective mental health is in the toilet.
Having been a single parent myself, without the benefit of free child care from family living living on another continent, I am familiar with the pain.
My childcare arrangement, as a full-time working mum, consisted of a patchwork of friends, other school mums, cheap after-school programmes and a revolving door of young nannies. This was pre-covid and pre-WFH when your absence at work was noticed. If it was a reoccurring thing, you would likely get the axe. Journalism was merciless. Maybe it still is? Stories don't write themselves.
It was a stress fest of unceasing deadlines, juggling of childcare and a lot of running around to manage a household on my own. Student flatmates to make ends meet, sick kids, parent teacher interviews and the elusive goal of work life balance.
It was several years before I was able to carve out a four-day workweek that included a few days of school pick-ups. On the one hand, it was reassuring the kids were at home and not in the after-school programmes they despised, but it was also a pressure cooker trying to get interviews done with kids banging at the office door demanding sandwiches and snacks, and hard deadlines hanging over my head.
Journalism is a tough gig because you have to deliver. And at the risk of sounding ancient, before the media was savaged to its existing skeletal state, there was a fortress of subs to get through, which meant you couldn't just rewrite a press release and file it with a single quote. Single-source stories were (rightly) thrown back in your face, and typically, you had 2-3 sources so you and your readers could be offered differing perspectives. But this is not a pity party. I'm just glad I'm at the other end of it.
I was reminded just how tough it can be after catching up with a good friend going through the wringer with a terribly messy divorce, made even worse by money problems and custody issues.
I shared some resources with her and thought this week's blog might be helpful for others in the same boat.
Know your rights
In the case of my friend, who was the leaver in the relationship, her ex took revenge in the most cowardly way, via the children. Because she was forced to leave the house, she was left homeless, literally. Her access to the kids was another form of control, and abuse, which he used liberally to punish her. It is widely known that unless one parent is an abuser, you shouldn't prevent your kids from seeing the other parent. For some reason, my friend's lawyer advised her to try to get her relationship property matters sorted first, and for almost two years, they have not had a custody order. The effect of this has been soul-destroying for my friend.
Know your rights. Visit the Ministry of Justice website here for Relationship Break up guidance.
Get your finances sorted ASAP.
As dreadful as it may seem to think about doing a budget, getting a second job or figuring out if you'll be left homeless, you need to be pragmatic. Figure out your financial position and try to get some agreements while formalising your separation and relationship property.
If you're the primary caregiver and work a minimum of 20 years, you will likely be eligible for Working for Families, and the additional support is not insignificant. Apply for what you can as soon as possible, and if its child support, make sure you get that in train ASAP via Inland Revenue. One friend, assumed that lawyers would make things happen faster, and to better effect but was left instead high and dry.
She didn't see a single cent and is still waiting for resolution in the courts. If she had gone to Inland Revenue in the early days, at least she would have had help with child care costs. You can work out what your potential support payments are from WFF here.
Get the support you need
Don't stress, if you can't afford a lawyer. You may qualify for legal aid. You can also consult with the Citizens Advice Bureau to get further support.
Like cancer, the longer you let your problems fester, the worse the outcome will likely be. Surround yourself with loving, helpful and supportive people, and try to minimise the time spent wallowing in anger, sadness or bitterness. Easier said than done, I know but focusing on taking some practical measures will not only be helpful for you, and your kids but also distract you from the pain and grieving you inevitably need to process. "Getting through it all" takes much longer than you may expect. Years in fact.
So, it is best to get on with the things you can change, like bank accounts, mail forwarding, and child care arrangements, so you can rebuild the life you desire, along with your tattered finances.
Procrastinate at your own peril.
You don't have to be an economist to understand the effects of inflation. You feel it every time you shop, whether purchasing a flight, veggies or even dog food.
We've all become numb to these sky-high prices but tend to experience at least a weekly price shock.
Last week, I had mine at the Countdown in the pet food section, which has been hallowed out recently due to supply chain problems.
I gasped recently when I saw my dog's favourite brand shoot up by $2 a tin. Not to $2 but up by another $2. I bought one and then went looking elsewhere. I found it $1.30 cheaper somewhere else and loaded up.
Because we don't live off dog food, these are marginal savings. You're not likely to notice a huge difference in isolation. But if you apply the same vigilance in the hunt for savings across all spheres of your personal finance life, you may see a difference, even if you have to squint.
You might need to stock up on eye wrinkle cream the way things are headed.
Despite the government hoping for inflation cooling, the latest numbers show no change. Okay, it dropped 1/10 of 1% from 7.3% to 7,2%. Big deal!
To add insult to injury, we've also been dealt a further blow with a sharp decline in asset values in both the housing sector and the share market. The average KiwiSaver Growth fund is down by 10% year to date. Yup, it's painful.
You may console yourself by remembering that KiwiSaver (unless you're saving for your first home) is a long game. So think long-term and take a deep breath, right?
Even then, when you look at the long-term returns, those sunny days of 11% p.a. returns are fast fading from memory. Across all peer group averages, they've sunk around 2% p.a., pulled down by the recent meltdown, er, should I say 'correction.'
To compare returns and fees over the life of KiwiSaver, follow Morningstar's quarterly KiwiSaver reports here.
Looking on the bright side, you could choose to look at today's deflated share prices as a discount. We're entering a bear cycle, but it won't last forever. So anything you buy now will likely rise again. We just don't know when.
When KiwiSaver first launched in 2007, it was around the time of the Global Financial Crisis. Back then, default funds (which were Conservative in profile, not Balanced as they are now) and actual Conservative Funds, withstood the blows better than their Balanced, Growth and Aggressive counterparts.
It was demoralising for first-time retirement savers still trying to wrap their heads around KiwiSaver, but those who stuck it out were rewarded in the end with much higher returns.
From that low, we saw one of the longest bull runs in some time, including housing. Markets were almost gravity-defying. They kept going and going, even through Covid, a byproduct of Central banks printing money to prevent total economic ruin.
Fast forward to 2022, when we should be celebrating to return to quasi-normalcy in a sorta-post-covid world, we get slammed.
The effects of all that cheap money finally caught up.
Hence, inflation is at 7% and higher in some places. And interest rates creeping back up to levels that younger investors will have never experienced.
I still remember when my sister bought her first home. We were all very excited for her. Her interest rate was a whopping 14% something that is unimaginable to today's borrowers.
I'm not forecasting or suggesting we're headed back to these crazy highs. Far from it, it would create mass homelessness in New Zealand.
Banks deliberately build a buffer when assessing your ability to service a mortgage. It's called stress testing. Currently, many of them are stress-testing would-be borrowers at 8%. With inflation, what it is, many hopefuls will be knocked out before their first meeting.
Since June 2021, fixed-rate mortgages have increased by almost 4%. On an average mortgage of $650k, you'll be paying around $1,000 extra monthly to service your debt.
The pain is real if you have kids or pets, drive a car, and like to eat.
Personal loans are rising in popularity, and food banks are busier than ever. People are struggling.
So easy wins to reign in costs include the following:
It is increasingly hard to save but not impossible, and if you approach it like a challenge, you'll find more joy in it.
When it comes to money, attitude and behaviour are everything.
We may not be out of the woods yet, but sitting idly with fear, worry and/or apathy isn't going to move the dial. That's on you.
(The usual caveat applies. This is not personalised financial advice. If you need some, see fee based authorised financial advisor. Check out the FMA website to find out more.
Are you a schizophrenic investor? Here's how to keep a cool head and set a clear course
You've heard it many times. Those who don't learn from history are doomed to repeat it.
It wasn't that long ago I wrote in this blog for Simplicity KiwiSaver about the cost of knee-jerk reactions to investment market jolts.
It was back in March 2020, around the time the first big wave of Covid had a tsunami effect on the markets. As usual, when significant market movements make mainstream news, investors wakeup. In the case of KiwiSaver, it jolted many erstwhile apathetic investors to log in to their accounts for the first time and look at their balances. Naturally, when you see balances drop and returns move into negative territory, you feel seasick and search for solid ground.
A quick recap for those who don't remember: We saw an unprecedented rush of DIY investors switching fund types and doing it without any proper advice. Like buffalos fleeing a bushfire, fear drove them from one precarious situation to another. In that case, right over a cliff's edge.
The exodus at that time was from Growth funds, which were getting hammered the hardest, into Conservative funds, then perceived as a safe harbour.
As I explained in my blog, losses in KiwiSaver, or another investment-type product, are only paper losses until you make a tangible move, like withdrawing them. The losses are therefore realised when you take action. In this case, investors crystallised those losses by selling one fund type, and buying another.
Given all that is happening in the world these days; geopolitical instability, the Wild West of investment trades and structures, cheap credit, quantitative easing, and now unprecedented inflation and interest rates, it is very difficult to know how best to sail these rough seas. When hedge fund behemoths like Ray Dalio start chiming that "cash is no longer trash" you know times are really tough.
Not unlike climate change, we tend to be experiencing the opposite of what we expect, or at least what was forecast. And in many cases, the outcomes are more dramatic than expected too.
Those who switched in early 2020 from KiwiSaver Growth funds to Conservative funds, were reminded of the wicked temperaments of the markets when Growth funds shot back up only a few months later. The returns seem to defy gravity, until just recently.
Those that ended up switching out, then back into Growth fund when returns appeared healthier, paid the price. Literally. They crystallised their losses, then paid more to buy back into the fund they had just abandoned.
Those who went into Conservative from Growth and stayed, are now seeing history repeat itself but this time the fund fortunes are reversed. Conservative funds are now trending down worse than Growth funds, which had years of unnaturally high returns to cushion the latest meltdown.
The tech revolution has been fantastic for so many areas of our modern lives, but in the investment space tech's ability to serve investors responsibly has moved ahead of people's ability to use the technology wisely and knowledgeably.
I hate to think of the aggregated account losses in all those $250 fractional share accounts where investors bought on impulse, trend or in some cases, even allowing their kids to select based on the colour of the fund that appeared in their app. I'm not making this s-t up. In one of the more popular finance forums, where a legion of newfound DIY investors share their 'expertise' with one another, I read that colour choice comment from a mother when (she) was responding to another person's questions on how to choose the right fund type for a kid's account.
Previously, if you wanted to choose or switch your investment portfolio up, you had to do that via a financial advisor or a broker, or someone else (presumably smarter and more-savvy than you).
I'm not saying the 'good-ole-days' of being forced to use a financial advisor or broker at a much higher expense, and being turned away at the door for less than $25,000 is superior to our current environment but it was some measure of protection that is absent now. And yes, there are plenty of examples (pre-fin tech revolution) of bad eggs fleecing too trusting mum-and-pop investors. Think BridgeCorp and the like. But that unfortunate time shouldn't be used as an excuse to ignore the hazard that easy DIY investment platforms have created.
A little too late to the party, we have the regulator posting on Facebook or Linkedin with educational tips that barely anyone reads. It is like the horse has bolted, and they have set out the neighbourhood watch to round them up with dog whistles.
KiwiSaver may be getting on in age (it was introduced in 2007 when I moved to NZ from Canada), but in relative terms, it is still spanking brand new.
It has only been in the last few years, that many enrolled in the scheme have woken up to the fact that KiwiSaver is not one single entity that swallows money from their pay cheque each month, but a range of individual different players all vying for a slice of that juicy pie.
Just how big is that pie?
According to the latest FMA report on KiwiSaver, the honey pot now holds close to $90 billion, the collective savings of close to 3 million New Zealanders.
From the very beginning, when I first started reporting on KiwiSaver, it was speculated that at the point at which members' accounts reached the equivalent value of a small car, they would begin to take note. With average balances now hitting the $29k mark, that's precisely what we are seeing.
Investors have become more knowledgeable about the fact that they have agency i.e. they can switch to one of several dozen providers who among them, offer hundreds of different fund types.
They now feel like they have some buying power and can demand more from their provider, which is great. They ask questions about performance and fees and how much they pay in tax. Also awesome.
But there is still a huge gap to close beyond those basics and more fundamental questions about risk tolerance, contribution rates, and how much they are on track to have in expectation of their time frames for needing their money i.e. buying a first home or hitting retirement at age 65.
For a price, some providers build in 'advice' for their investors, but few are aware of that and even fewer take advantage of it. How do I know? Because I've sat at roundtable discussions where fund managers have been attacked for their higher fees (justified because of the advice component) and admitted that people don't know, don't care, or can't be bothered to get advice.
Until people start to care more, history will continue to repeat itself, and some expensive mistakes will be made. When is that magical turning point? My guess is when balances hit the equivalent valuable of a more expensive car, the one that you baby, clean weekly and get annoyed by parking lot dints. So maybe somewhere in the order of a Tesla for example, at $70k ish.
Until then, there will be plenty more crash and burn and angry investors getting upset at fund managers and/or the FMA that they weren't better warned, prepared, or educated.
There is always someone to blame and more often than not it is a deflection for not taking more personal responsibility.
Don't let that be you.
Check your Fund Profile here using the Gov'ts finance website Sorted.
Your Provider will also have fund profile tools and or advisors in some cases, so check that out too.
I’m sure a few Millenials choked on their oat milk lattes this week when they read the latest news about how much they’ll need to have saved to enjoy a comfortable retirement.
According to researchers at NZ’s Massey University’s Fin-Ed Centre, if you want to have a retirement that comes with ‘choices,’ you’ll need around $755k in your KiwiSaver or an equivalent savings vehicle.
Oh, and that figure also assumes you have paid your mortgage in full, or you’re living rent-free then retirement.
Given the average amount saved by New Zealanders currently is around $30k, many will be working well past retirement age to afford those flights to Bali or to visit their future grandkids in Australia.
Of course, where you’re at savings-wise depends on a range of factors, not the least of which is how long it is before you actually stop working for a living.
The Financial Markets Authority, which serves up an annual report on KiwiSaver full of juicy stats, provides a nifty breakdown of how many investors are by gender (yes, so passe) and age.
You can see the bulk of them have a long way to go to reach the golden age of 65, and thereof
have plenty of time to pad that nest egg, that will hopefully buy them choices in their golden years.
Most people should be concerned about their current levels of savings, but the reality is most will not have read this latest research or even have a clue who their KiwiSaver provider is, let alone know their balance.
The truth is, numbers scare people. And true to the reptilian brain which we have yet to evolve from, they will run rather than face their fears and take action to deal with a savings shortfall that is potentially avoidable.
The sad reality is that it doesn’t take much effort to figure out the above and set a course of action.
So for those who don’t know, or even know but want to help someone who doesn't, here’s a simple plan:
Your annual KiwiSaver report shows you how much you’re on track to have by age 65 based on your current contribution rates and fund type. This is a conservative estimate, as the FMA introduced a standardised calculation method a few year ago using conservative long-term figures. They did this because some providers rather sneakily for the purposes of luring new customers used sky-high annual figures based on bull market double-digit returns, annualised over 40 years. In other words, they overstated what you’re actually likely to earn over the working life of KiwiSaver when factoring in market cycles and meltdowns, like what we've currently seen. For these long-term projections, they are based on returns of:
4.5% for a Growth Fund
3.5% for a Balanced Fund
2.5% for a Conservative Fund
You can also read some of the FMA's scenarios on their website based on differing income and contribution levels which will give you an idea of how a 3% contribution rate looks long-term to 4% or higher. They also discuss boring but important things like inflation (which, as we now know, matters) as well as the inclusion of superannuation contributions. Also, handy. Pray that's still on offer when you retire.
Okay, so now that you know how much you might expect in retirement, you have a few options for addressing any potential shortfall. Please note: this is not personalised advice, only information for you to consider:
Whatever path you choose is your choice, and comes down to priorities and goals. Whatever you do, don’t use lack of information as an excuse. Everything is out there ready for you to discover. And thanks to more rigorous regulatory enforcement in recent years, the financial services sector can no longer be blamed for making information hard to find or understand. Time to stop looking for scapegoat's and take action.
Many parts of my life make it a rich one. Most have little to do with money or my net worth.
In no particular order, I'd say it is my health, friends, family, interests and environment.
Find your Flow, and the Money will Follow.
Recommended reading: The Top Five Regrets of the Dying.
Amanda is a personal finance expert who draws on Eastern wisdom to help you grow your wealth and wellbeing. Money Matters: Get Your Life & $$$ Sorted is published by Penguin Random House.