NZ Herald 24 December 2022

ALast thing first. There can be no guarantees about how a future government could change KiwiSaver. But I can’t imagine a government removing people’s right to withdraw money for a first home. There would be a huge outcry, and I bet they would lose the next election!

Generally, KiwiSaver will serve your purpose well. I recokon it’s as secure as any other investment except those guaranteed by the government. However, there are a couple of other issues to consider:

• These days many young people are not planning to buy a home. Of course that’s partly because of the ridiculous property prices. But some people realise that home ownership is not the only way to succeed financially. As long as you save hard and invest widely and wisely — so you have plenty to cover accommodation costs for the rest of your life — that’s a legitimate approach to retirement saving.

  In light of that you might consider using a non-KiwiSaver fund, so each child can withdraw the money to make other investments or perhaps start a business.

• I suggest you take care to treat your children equally, or there could be a family rift down the tracks. If you give them all the same amount now, the younger ones are going to have much more at, say, 25 than the oldest one — as your example shows.

  One way to make things equal would be to make the gift to each child when they turn 21, with the younger ones’ amounts being adjusted for inflation. I’ll explain how to do that in a Q&A below.

If you want to invest the whole $150,000 or so now, you could put the money for the younger two into a non-KiwiSaver fund, and use that for their gifts at 21. Assuming the fund earns more than inflation, there should be some left over. When the last one is 21, you could divide that excess by three and give it to all of them then as a bonus.

By the way, your suggested 7 per cent return is probably overly optimistic. Read on.

AFair cop! Last week we were talking about investments in KiwiSaver growth funds, which generally hold mainly shares and have higher returns than lower-risk funds.

When financial providers and advisers make projections about performance in such funds, I’ve seen them use rates higher than 8 per cent. But that’s no excuse. I should have looked at the data. So now I have.

The authoritative source is Credit Suisse’s Global Investment Returns Yearbook, which is put together with the help of some top academics.

Their early 2022 yearbook says real returns on world shares since 1950 have averaged 7.2 per cent, but since 1990 it has been 5.2 per cent. And they expect future returns to be lower.

Note that these are after adjusting for inflation, so the “raw’ numbers — the ones that we tend to use — would be higher. Note, too, that my first choice last week was to use 6 per cent. But still, I shouldn’t have then added the 8 per cent returns.

Footnote: It sounds as if your returns might have been worse than average — assuming you are investing in higher-risk funds. Check your funds in the Smart Investor tool on sorted.org.nz. Perhaps you are paying high fees, and might want to move to low-fee alternatives.

AYou make another good point about last week’s numbers. Inflation has been pretty low over the last 15 years, until recently. But still, it makes a difference over longer periods, and it’s good to understand that.

To find the average inflation rate since mid-2007, when KiwiSaver started, go to the Inflation Calculator on the Reserve Bank’s website. It shows that since the third quarter of 2007, annual inflation has averaged 2.4 per cent.

To adjust for this, when we use an online calculator to see how much $1,000 would grow, at 6 per cent after fees and tax, we subtract the 2.4 per cent inflation from 6 per cent, and use 3.6 per cent. (This is not perfect mathematically, but near enough for our purposes.)

That gives us a little more than $1,700 — compared to $2,450 without inflation. And if we are looking over 65 years, which we also did last week, we get $10,350 — compared to nearly $49,000 without inflation. Wow!

If the Reserve Bank succeeds in its current attempts to bring inflation back to its target midpoint of 2 per cent, that will reduce the inflation effect somewhat.

AWho knows? But it’s certainly a good idea for people with long-term deposits to look into making a change like yours. Thanks for telling us about it.

One suggestion: when you reinvest, you might want to break up your money into, say, three lots, with different maturity dates — to reduce the risk that all the money will mature when interest rates are unusually low. I’ve described this before in the column. It’s called laddering.

ASays an ASB spokesperson, “Thanks for bringing this to our attention. From the information you’ve shared, it appears we did not have the full picture of this customer’s financial situation.

“We have reached out to the customer to request more information and will take another look at their application based on that.”

It sounds as if ASB needs to make some changes to its credit card application form.

I hope the magic works!

AThanks for words of wisdom from one who has been there.

AYes, you can transfer to another KiwiSaver provider at any time. All you do is contact the new provider and they will arrange to move your money.

Can I just suggest you don’t consider only the big KiwiSaver providers? There are some really good low-fee smaller providers that offer funds that invest with the environment in mind.

The Mindful Money website gives you info on who offers what. And the KiwiSaver Fund Finder tool on sorted.org.nz will help you find providers with low fees and good services.

AAnd thanks to you for a lovely encouraging letter. You’re right — most of the basic messages don’t change over time, although there are always new variations on the themes.