We were looking at some of the problems with KiwiSaver and wondered how things could have gotten so bad.
Less than 50% of New Zealanders are sitting in the right fund, less than 20% of people understand KiwiSaver and over 20% of people remain in temporary parking lot funds (also known as default funds).
A second look at the name and we realised that maybe we started out on the wrong path, to begin with.
KiwiSaver is a misleading name in our view. KiwiSaver should have been called KiwiInvest instead.
Let’s look at the definitions according to the Cambridge Online Dictionary:
Saving
- The activity of keeping money so that you can spend it in the future
- An amount of something that you do not use or spend
- The money that you keep in a bank
Investing
We are all investing in KiwiSaver to achieve a better retirement or first home deposit. We start early so that we can maximise the amount available for our retirement - we want to benefit from compounding interest.
By calling it KiwiSaver, people have been lulled into a false sense of security - the name suggests that it is a simple savings account (this might be why banks control 75% of the KiwiSaver market). Savings accounts for most people are all the same, you simply choose between a red, green, blue and yellow branded account – once it is set up there isn’t much more to do.
In reality, KiwiSaver is an investment product with many decisions that need to be made along the way.
Savings accounts
Keeping money saved in cash is the lowest risk option as you are guaranteed the amount you put in.
In general, there are two different types of bank accounts - current accounts and savings accounts. Savings accounts will pay you interest, though will often have higher transaction fees to discourage spending. Any growth you might get from a savings account comes from the interest rate your savings earns from your bank.
A savings account makes sure your money isn’t tied up as you can access it at any time. It’s ideal for the short term and as an emergency fund for the unexpected.
It’s essential to have a savings safety net because it will give you the confidence to build your wealth using other options.
One of the potential drawbacks involved in a savings account is when the interest your savings earn doesn’t keep up with inflation (the rise in the cost of living). Keeping all your spare cash in a savings account could result in you losing purchasing power over time.
Different types of investments
Bonds (Income assets) – Bonds are effectively loans to companies. When large companies need to borrow money, they will issue bonds directly to investors as an alternative to going to the bank for their loan. When you purchase a bond, you are purchasing a tiny slice of that loan. Bonds have lower returns and lower volatility which suits short to medium-term investors.
Shares (Growth assets) – When you buy a share you purchase a tiny slice of ownership in a company or a group of companies. Some times shares are listed on a stock exchange, and sometimes they are held in private companies. Of the different types of investments, shares have the highest risk, this means they will grow in value faster than other investments, though there will be more ups and downs. The ups and downs mean they are good for long term investors.
How should you invest
Invest directly in shares or bonds – there is a range of new platforms around that will allow you to purchase bonds or shares directly. If you are going to invest directly in bonds or shares make sure you spread your eggs into a number of investments and only invest in the things that you understand.
Invest through managed funds – managed funds are vehicles where everyone’s money is pooled together and managed collectively. We are big fans of managed funds as they are a way for everyday investors to achieve diversification (spreading investments thinly across a variety of companies), minimising costs and having someone employed to monitor the investments full time. You can easily access a wide variety of managed funds through Sharesies or InvestNow.
KiwiSaver – your KiwiSaver account is actually a managed fund. Your money is invested in a range of cash, shares and bonds to match your risk tolerance and time horizon. It is a cheap and easy way to invest and you can contribute small amounts every week. It also has the added benefits of employer and government contributions (free money).
In summary
Have we been misled by a name? Do we think that a different name might lead to people being more engaged and making better decisions with their KiwiSaver accounts? As one Senior Bank Executive recently stated: “our struggle is to get people to understand that KiwiSaver is actually a complex investment product rather than a savings account!”
The kōura difference
At kōura, we understand that figuring out your retirement can be complicated - for most of us it is, after all, ages away! This is why before you invest in our portfolios, we give you an indication of what your KiwiSaver account might contribute toward your objective. Hopefully, this gives a realistic picture of much you can rely on your KiwiSaver money for your retirement. Give kōura a try now and see how your retirement looks.
Footnotes:
- 90-Bank Bill Rate
- MSCI ACWI (All Country World Index)
- S&P NZX Bond Index and Bloomberg NZ Bond Composite
