This article was published on 16 August 2008. Some information may be out of date.

Q&As

  • Advice on investment during retirement has worked for these readers
  • KiwiSaver contributions holidays will be easy to take
  • Reader dislikes last week’s answer on KiwiSaver fund performance

QJust a comment about a reply to a question you gave five years ago about “Where should you invest your money in retirement.”

It struck me as being so blindingly simple and logical that I’ve always remembered it and wondered if you had ever thought of publishing this gem again?

I believe your answer was along the lines of:

  • Keep the next 6 months of required income in cash.
  • Keep the next 2.5 years of required income in term deposits or government stock of appropriate maturities to maintain a).
  • Keep the next 7 years of required income in high grade corporate bonds or capital notes of appropriate maturities.
  • Keep the rest in New Zealand or international shares, where it will grow faster.

As the respective items mature, put what you need into cash and reinvest what’s left over to try and keep the term deposit and corporate bond maturity structure intact.

While we have made minor variations to this in our retirement, the essential idea of selecting investment types that suit the time periods, and then reinvesting from the short duration back into long is a great idea!

Even if you do strike problems and need some cash suddenly, bonds or shares are very easily converted to cash.

AWhen I read your letter I thought “why not publish ‘the gem’ again now?” — especially as you have summarized it all beautifully. Thanks.

There are a few points to add. In current times it’s particularly important to be sure the corporate bonds are of high quality. A good sharebroker or financial adviser will help you choose.

Try to “ladder” your bonds, so that they mature at different times. This is partly so you can feed the money gradually into term deposits or government stock, but also because it reduces risk. With interest rates moving up and down, you don’t want all your bonds to mature at a time when interest rates on your new investments happen to be low.

The share investment can be in a share fund. While you have to pay fees, it’s a great way to get broad diversification and to let someone else worry about the dividends, tax and so on.

As you say, shares are expected to grow faster than the other investments, but only on average. There will be years, like the last one, when their value will fall. So you have to be prepared to hang in through those periods.

If, every year or so, you sell some shares or share fund units and put that money into corporate bonds, sometimes you will sell when the market is down. But, given that shares rise more than they fall, you’ll be selling in a strong market more often than not. Over the long term, it should average out positively.

QI have been told that to take a KiwiSaver contributions holiday of up to 5 years that I must apply to IRD, and it is not guaranteed that they will accept my application. Do I have to plead poverty or is this my right?

This will make my decision to join up or not.

AGo ahead and get on board. Inland Revenue says it will “automatically approve” anyone’s request to take a contributions holiday, as long as you have been in KiwiSaver for 12 months or more.

Check out the form on www.kiwisaver.govt.nz, by clicking “KiwiSaver forms and services” on the left side. It’s all quite simple.

If you have been in KiwiSaver less than a year, you have to explain that you are experiencing financial hardship — although I’ve heard anecdotally that it’s not all that hard to do that.

If anyone has a problem taking a holiday after they have been in the scheme for more than a year, please let me know.

Non-employees don’t even have to go through the process. They can just stop contributing at any time.

While we’re on the subject, not everyone realises that if you take a contributions holiday you can continue to contribute any amount you like — not via work but directly to your provider. And I would highly recommend that you keep putting in any amount up to $1,043 a year, because that will be matched dollar for dollar by the tax credit. Your money is doubled.

If you are on a contributions holiday, your employer won’t have to contribute. But if you ask nicely they may be willing to put in up to $1,043 a year, as they will get that reimbursed by the government.

While employer contributions are usually not taxed — up to the lower of the employee’s work contribution or 4 per cent of the employee’s pay — they would be taxed if you are on a contributions holiday because your work contributions are zero. Still, the after-tax money would be a good boost to your KiwiSaver account.

QI refer to the request last week from a letter writer for a yearly league table of fund manager returns and your response saying that you hoped no-one provided it.

I think that you have lost sight of the wood for the trees.

Irrespective of the benefit that you correctly identify from the government contribution (which is only returning my own tax money to me anyway), fund managers should still be measured and held accountable for their absolute and relative performance. Such league tables take nothing away from your cautionary comment that returns should still be judged over the long term.

Roll on the media organisation that picks this up and presents a simple picture of what a $1 investment is worth in each fund every year, and compounded for a number of years as the years roll by towards a happy and prosperous retirement funded in part by KiwiSaver.

AI can see your point. It does seem ridiculous that fund managers shouldn’t be accountable. It’s just that misleading information can do more harm than good.

Once KiwiSaver has been around for, say, five years I would feel somewhat more comfortable with the media publishing five-year results. And once we get to more than ten years, it would be better still — as long as they published only the long-term results. There’s still the worry that single-year results will dominate, and lead to people leaping to the wrong conclusions.

My worries are not confined to the fact that funds that do well one year often do badly the next. I also worry that:

  • The news media are likely to compare similar but not identical funds in terms of the assets they invest in.

    Let’s say Fund A holds 50 per cent shares and 50 per cent bonds, while Fund B has 45 per cent shares and 55 per cent bonds. In a year in which shares boom, Fund A will probably perform considerably better than Fund B, even though it might be worse managed.

    Most investors won’t know how to judge the management, though, and many may switch from B to A, only to find that in the following year, when shares tumble, A performs much worse.

    This is all complicated by the fact that most KiwiSaver funds hold more than two asset types. It will be really tricky to compare apples with apples.

  • The only meaningful comparisons will be after fees are taken into account. And the KiwiSaver fee situation is, frankly, a mess.

    When I was writing my new KiwiSaver book I searched for a reliable way to compare fees. The best available, I think, is the KiwiSaver fee calculator on www.sorted.org.nz.

    The Retirement Commission, which runs that website, has spent many hours trying to make the calculator fair, but several providers are still unhappy with it.

The only way out of this, it seems, is for the government to tell all KiwiSaver providers: “If you want to be part of the scheme, you must charge your fees in a standard way” — probably with a fixed amount per year to cover admin costs plus a percentage of the amount in each account.

And everyone will have to disclose the same inputs into their fees — rather than having some providers burying some items.

The Ministry of Economic Development is looking into making changes in this area. Fingers crossed.

Where does all this leave us? Perhaps choosing our KiwiSaver provider and fund based on other criteria for the first few years.

The fact is that your choice of fund — whether you go for a conservative fixed-interest fund or a riskier share and perhaps property fund or a combination — will probably have much more impact on how much you accumulate in KiwiSaver than which provider you choose.

As the years go by and we have longer-term data — and hopefully more comparable information on fees — league tables should be more helpful.

Even then, though, I’ve seen fund managers perform brilliantly for more than a decade and then fail dismally. So I’ll still be advising KiwiSavers not to rush into moving to the “winning” funds.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.