NZ Herald 23 August 2008

APhew, I just got your letter into the column in time — about seven weeks after you sent it. Once you turn 65, you can’t join KiwiSaver, so be sure to get in right away.

What your bank has told you is exactly right. And KiwiSaver doesn’t affect your NZ Super in any way.

You put in $5,215 over five years and your money is much more than doubled. Even if you earn a return of just 3 per cent a year, after fees and taxes, in a conservative KiwiSaver fund, you will end up with about $12,300.

To do that well outside KiwiSaver, you would have to earn more than 36 per cent a year — a return you are highly unlikely to receive even on a really high-risk investment.

KiwiSaver is a terrific deal for older people. While the young can also do really well from it, they won’t get average effective returns nearly that high over the years.

Why the young/old difference? I’ve written before about it, but here’s another way to look at it:

As long as you contribute at least $1043 a year, the government will match that. And in some cases you will also receive employer contributions. In the early years in KiwiSaver, this extra money from others makes a huge difference to your returns.

Let’s say you have a KiwiSaver account balance of $4,000, and you make a 3 per cent return after fees and taxes, which comes to $120. Then along comes the government, putting in a $1043 tax credit — almost nine times your return. And an employer might even add more.

For those over 60 — or even 55 or so — government and sometimes employer contributions will almost always completely overshadow ordinary investment returns every year.

For a younger person, the same thing will happen in their first five or ten years in KiwiSaver. But what about 30 years down the track?

By then, their KiwiSaver balance might be $500,000. With their longer term perspective, they would hopefully be in a higher risk fund, which might make a return of 8 per cent after fees and taxes. That amounts to $40,000 a year. The government’s $1,043, and perhaps the employer’s few thousand dollars, are nice to get, but they don’t make all that much difference.

Over the years, then, the younger person’s total returns won’t be boosted as much by government and employer money as the older person’s.

While the young have the huge advantage of having time on their side — and therefore the possibility of building a KiwiSaver account to half a million dollars or even a million or more — they don’t get such high average effective returns.

There’s another reason, too, that KiwiSaver is particularly good for those approaching 65. While some of the young worry about tying up their money for decades, those over 60 are tying it up for only five years. And most, by then, will be happy to set aside some of their income for later on.

KiwiSaver at that stage of life is actually such a good deal that it makes sense to use up other savings, or even borrow if necessary, to get $1043 a year into KiwiSaver.

AThose providers are wrong. There’s a lot to know about KiwiSaver, but still I’m shocked that the people you spoke to didn’t know that pretty basic information. It’s even more surprising, given that their advice is likely to put you off joining.

Everyone in KiwiSaver gets at least five years of incentives, so if you join at 64 they continue until 69.

Please, KiwiSaver providers, tell your customer service people that if they are not sure about something, they should utter three simple words, “I don’t know”, and then check a reliable book or website, such as www.kiwisaver.govt.nz or the new KiwiSaver Basics page on www.maryholm.com. [This page has been removed from the website. Visit kiwisaver.govt.nz for up-to-date information.]

The information on my website is from my new book, “KiwiSaver Max: How to get the best out of it”, and it has been checked by officials at Inland Revenue and Treasury.

AThe bonds versus shares decision — like most investment decisions — is a tradeoff between risk and return. On average, shares bring higher returns but they are also more volatile.

Share volatility decreases the longer the period. You are much less likely to lose money in shares over ten years than over three years, and a loss is extremely unlikely over 20 years or more. Many experts agree that ten years is a good cut-off point. Don’t invest in shares, they say, unless there’s at least ten years before you plan to spend the money.

Perhaps, though, you have a high tolerance for risk, and could cope well — financially and emotionally — if the share market moved against you and you had less money to spend in retirement.

In that case, perhaps you could make the cut-off at seven or eight years — or even less. But don’t complain to me if you end up sorry you did that!

I worry, though, about your “basket of shares”. For many New Zealanders that means shares in just a few companies. Unless you are in about 20 companies — some would argue it should be 50 companies — and your portfolio is reasonably evenly spread over all those companies, you are taking more risk than in a diversified share fund.

On your last comment on yields, are you taking note of the terms of the bonds you are looking at?

In the current environment, with most people predicting interest rates will fall, you’ve got to expect a bond that matures in two or three years to pay lower interest than a term deposit that matures in six months. If you kept your money in six-month term deposits, chances are high that two or three years from now they would be paying considerably lower interest than the bond.

Generally, high-quality corporate bonds, which are a bit riskier than bank term deposits, are expected to pay slightly higher average returns when you look at the whole period of the investment.

Nevertheless, if you feel bond yields are poor, you could always just stick with term deposits and government bonds for the full seven or eight years.