Be in to win
Ever since the government announced its added incentives to KiwiSaver last month, everyone is talking about the retirement savings scheme. And well they might.
While I still have reservations about the distortion of savings decisions, and while many employers are angry at being forced to contribute, practically all individuals will be better in than out.
KiwiSaver is often called a workplace savings scheme, but everyone under 65 — including the self-employed, beneficiaries, and other adults not in the work force — can and should join.
True, non-employees miss out on compulsory employer contributions from April 2008. But they benefit from more flexibility.
If you are a non-employee, you can make just a one-off contribution of, say, $10, as long as your provider will accept that. You’ll get the $1,000 kick-start, and your $10 will be matched by the so-called tax credit of the same amount.
It’s smarter, though, to contribute $1,040 a year — the maximum that will be matched by the tax credit. Matching means that twice as much goes in, and twice as much comes out in retirement. Brilliant!
If you contribute more than that, you gain no more incentives. And since your money is tied up, usually until 65, you may prefer to do further saving elsewhere.
Employees are obliged to contribute 4 per cent of total pay — on your main job or a smaller second job — for at least a year. After that, you can take contributions holidays, but you’ll miss out on a lot.
From April 2011, by which time employer contributions will be 4 per cent of pay, deposits from employees earning less than $26,000 will be matched by their employer and then matched again by the tax credit. Triple the money in, and triple the money out again in retirement. Even more brilliant!
For higher earners, the tax credit will be less than their own contributions. Still, employer and government contributions will more than double their money.
All this doubling and tripling makes a huge difference to savings totals. The $1,000 kick-start is icing on the cake. You’re silly if you don’t sign up and contribute enough to make the most of the incentives.
MORE ON DIVERSIFICATION:
After my last column, defending the idea of spreading your money over lots of different investments, a reader wrote:
“While I agree that in the long run diversification is a valid strategy, at the moment it is particularly dangerous because the major asset classes are highly correlated.
“Thus the sell-off in the global stock markets over the last couple of weeks was caused by a sell-off in the bond markets. Yet one of the main ideas behind diversification is that bonds and equities trade in opposite directions.
“Furthermore, given the high amount of leverage in the system at the moment, it is likely that rising interest rates will also hurt other asset classes like property and commodities.
“So, while diversification may work in the long run, to quote John Maynard Keynes: ‘In the long run we are all dead.’.”
My response: Keynes’ wisdom aside, you shouldn’t be investing in shares, property or commodities unless you are in for the long run. There’s too big a chance, over the short term, that you will have to sell in a down market and lose money.
Over the long term, there will have been booms to counter that. Also, if you have several years in hand, you can sell gradually out of riskier investments.
Another point: Just because different assets sometimes move together, that’s no reason to abandon diversification. What else are you going to do? Invest all in one asset type? That’s got to be worse.
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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.