- Insider tips from KiwiSaver provider about employee contributions
- Use KiwiSaver at 65 to pay off overdraft
QI work as an accountant for a KiwiSaver provider.
The system to get KiwiSaver contributions and deductions invested by your provider is slow, as the money is transferred via the IRD.
All KiwiSaver and other deductions such as PAYE are held by the employer and normally paid to the IRD on the 20th of the month following. This is then paid to the KiwiSaver fund a week or two later. This means that the funds are not invested for up to two months after the payday.
Employees need to pay the minimum through payroll (to get the matched amount from the employer.) However, if employees want to contribute more than 3 per cent (laudable), I recommend they do it by direct payment to their provider. Most payroll systems can facilitate this as a second bank account and pay it each cycle.
By paying the excess directly you are invested almost immediately.
Another option: most KiwiSaver providers will have a managed fund with similar investment strategies to your KiwiSaver, but you are not tied in until retirement. Or you could consider an entirely different strategy/risk (or even provider), thus adding diversification.
AThanks for some insider tips, all of which make good sense.
Employees’ KiwiSaver money does, indeed, take a long time to wend its way into KiwiSaver funds.
So it’s a great idea to ask your employer to send extra contributions directly to your provider. If your employer can’t cope with that, you can set up an automatic transfer to your provider out of your bank account the pay after your pay comes in.
Your suggestion of putting extra savings in a non-KiwiSaver fund is good for most people, as you say, because they can withdraw the money at any time. However, for those who might then be tempted to squander the money, tying it up in KiwiSaver works well.
QI will be 65 soon and am considering repaying my authorized overdraft of $32,000 from my KiwiSaver fund, as currently I’m paying about 8 per cent or about $250 per month in interest charges.
I only have about $36,000 in my fund, but plan to keep working for the next eight to twelve years — health permitting — to repay a joint mortgage loan and have some savings when my wife retires in about 12 years.
I don’t like the idea of paying interest and, apart from the overdraft and mortgage loan, do not have any other debts.
AIt’s a great plan. The way to weigh this up is to compare the interest you’re paying with the return you’re likely to get in your KiwiSaver fund.
If they were the same, you would improve your wealth equally by paying off an 8 per cent debt or by earning 8 per cent, after fees and tax, in the investment.
But will you earn that much in KiwiSaver? If it’s a higher-risk fund, you might if you’re lucky. But your return could be considerably lower.
In any case, I wouldn’t recommend such a fund for someone thinking of withdrawing much of their money soon. It’s wiser to be in a low-risk fund then — to avoid the possibility of a share market slump right when you want to withdraw. And low-risk funds tend to have lower returns.
So getting rid of the debt is a much better bet.
There’s another factor here too. You dislike debt — which is really good. So paying it off will add to your happiness. Please do everything you can to stop running up debt again.
Upside Downside Excerpt
The Reserve Bank is updating an online booklet I wrote for them several years ago, called “Upside, Downside — a Guide to Risk for Savers and Investors.” Over the past five weeks, I’ve been including excerpts in this column.
The updated booklet is being launched on the Reserve Bank website, rbnz.govt.nz, through September.
Risky behaviour: Taking on more volatility than you can cope with
People often make their first investment in a particular type of asset after it has performed unusually well. Examples of this are international shares in the late 1990s and property in recent years.
The trouble is that the types of investments that sometimes grow fast are also the ones that go through periods of no growth or even large losses.
We’re all aware that share prices can drop fast. We watched New Zealand prices plunge following the 1987 crash, and international prices plunge in 2001–03. And pretty much all markets slumped in the global financial crisis and the start of the Covid 19 outbreak.
What about property? While prices are less likely to fall fast, if you have borrowed to invest in property, you may find that a small fall in market prices translates into a much bigger percentage drop in the value of the money you put in. In some cases, your deposit will disappear or worse — as some people have discovered.
Before you invest, try this test:
- In shares or a share fund, imagine discovering a year after you first invested that the value of your investment has halved.
- In rental property, imagine an annual review in which you find several of the following: property values have gone nowhere or have fallen; rents have fallen; insurance, rates, interest or maintenance costs have risen fast; or your ability to cover expenses, including mortgage payments, is in doubt.
Or imagine that your tenants don’t pay or do damage to the property, or you have long periods with no tenants.
What would you do? If you would get nervous and bail out, you shouldn’t make the investment. You could end up buying high and selling low, and that’s no path to wealth. Look for something less volatile.
But if you feel confident you could hang in there — in the knowledge that long-term investments usually regain their losses as long as you are in a well-diversified share investment or a sound property in a good area — the investment is right for you.
Before choosing a higher-risk fund, think about how you will handle the inevitable downturns.
Risky behaviour: Letting your emotions rule your investment decisions
People often make unwise investment decisions because of their emotional reactions. Understanding common reactions can help you guard against bad decisions. Reactions include:
- Responding to how things are presented
People tend not to like an investment that loses money one year in 10 as much as one that gains money nine years in 10. Think about it!
Employees in a super scheme, offered a choice of five different fixed interest funds and one diversified share fund, put 43 percent of their savings in the share fund. Others in the same workplace were offered a choice of one fixed interest fund and five different share funds. They put 68 percent of their savings in share funds. And yet you would expect the two groups to have had the same desire to be invested in shares.
Don’t let the range of options influence you.
Our three graphs show annual average returns on international shares, including dividends, over one-year, five-year and 10-year periods. One-year returns were sometimes extremely high or low. When you average the returns over five years, though, the extremes are watered down. And over 10-year periods, the average has usually been less than 20 percent, but losses are also minor.
Given that shares are a long-term investment, concentrating on the short-term is worrying and misleading.
- Sticking with the status quo
List your investments and their approximate value. Then ask yourself: “If I were starting out now, would I spend that money on those investments?” In many cases, the answer will be no. So why don’t you sell and buy what you would prefer?
That’s not to say that you should flick in and out of investments because of what the markets have done lately. But it is to say that you should review your investments every now and then to see if they are still well spread across different asset types, and still suit your tolerance for risk and how close you are to spending the money.
- Responding to terminology
A super scheme changed the title of one of its funds from “Junk Bonds” to “High-Yield Bonds”. The investments in the fund didn’t change, but many more people invested in it.
- Following the crowd
Almost all of us are creatures of fashion to some extent. If everyone else is getting into an investment, we’re inclined to join them. Besides, if it goes bad, we’ll have plenty of company. That doesn’t make any difference to a loss, though. It leaves you just as badly off as if you were the only one who suffered it
You’re probably more likely to do well if you buy an investment when everyone else is selling, and sell when everyone else is buying, although even “contrarian investing” tends not to be as fruitful as just getting into the right investment for you and sticking with it.
- Emotional attachment
You may have investments you have inherited or been given, and you would feel disloyal selling them. But wouldn’t the person who gave them to you prefer to know you have moved your money into investments that suit you better?
- Being overwhelmed with information
Too much information can leave a would-be investor doing nothing. If you’re stuck, try to zero in on two or three good options, and divide your money equally among them.
- Fear of regret
You may have good reason to get out of an investment — perhaps it’s too risky, or too undiversified. But you don’t want to sell unless you get more than the purchase price. This can lead to sticking with a poor investment for years. Once you’re in an investment, it’s irrelevant what you paid for it. The only question should be: is this a good investment for me, going forward?
- Not considering the whole portfolio
Let’s say you’ve put some of your savings in shares or a share fund, but watered down that volatility by putting some in bonds. When you check how well you’re doing, don’t dwell on what’s happened to each type of investment. Concentrate on the results for the whole lot.
As discussed above, be aware of how some of these factors might affect your investment choices.
Risky behaviour: Taking on more work or worry than expected
Owning a rental property can be more like running a business than holding an investment. As well as maintaining the property, you have to select tenants, keep track of rental payments and take steps if they become overdue, and take care of all the financial details. New investors in rentals are sometimes surprised at how much time — and hassle — is involved, and how frequently problems can arise.
For example, in the year ended June 2023, 19,080 landlords and 4,709 tenants made applications to the Tenancy Tribunal.
While some people enjoy the landlord’s role, others strongly dislike it. Consider, before investing, whether you have the right personality as well as the right financial circumstances.
To a lesser extent, running a share or bond portfolio can also take time, keeping track of dividends, interest payments and so on. You can always pay someone else to manage your property or monitor your investments, but that eats into your return.
Investing in managed funds considerably reduces your investment management, although this can be offset by the management fees you pay. Look for well-run funds that charge lower fees.
KiwiSaver funds are run by their managers, so there is very little work for investors.
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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.