Q: I read your column every Saturday and have been encouraging my daughters to gain an understanding of money, savings and finance.
My wife and I enrolled all of our daughters into KiwiSaver early to gain the $1000 incentive. I have been tracking my youngest daughter's account, with ASB KiwiSaver Growth Fund, with her since we started in April 2014.
In 2014 it reported a gain of 9.42 per cent. In 2015 it reported a gain of 15.21 per cent. However, when I look at my daughter's fund today it shows a loss since April 2015, from $1088 down to $1030, with fees taking $34.54 and the fund "losing" $23.56.
While I of course appreciate that the government kicked in the $1000, it's not presenting a compelling message to invest in KiwiSaver when she starts earning money if in two good years there is a decline in value. According to me if she had made the returns ASB posted she would have $1260 less two years' fees.
A: I sent your letter -- without your name and details -- to ASB for comment.
A spokesperson replied that, "sharemarkets here and around the world have had a rough start to the year. However, young KiwiSavers should take a long-term view of their investment, consistent with their investment time frames."
She added, "Financial markets have performed very well since the bottom of the global financial crisis in 2009. This is reflected in the ASB KiwiSaver Scheme Growth Fund performance of 7.97 per cent per annum (after tax and management fees) in the five years to December 31, 2015."
She also encouraged you to contact ASB to help you understand "the difference between individual account performance and fund performance for the period."
I passed that suggestion on to you, and you replied: "I had actually emailed ASB without a response before I emailed you. However, yesterday ASB called me and I spoke to someone at the 0800 ASB RETIRE line.
"They explained that even though the gains are posted annually, of course people buy into the fund at different times. They said that unfortunately the fund was quite expensive when my daughter bought her $1000 worth of units. The fund was at 1.2717 per unit. Now they are trading at 1.4079. So a 10 per cent gain.
"That would have put us at $1100. However, fees decreased this by nearly $70. They said if she had (a) been contributing regularly, then some form of dollar cost averaging would have helped and (b) the fees would have been less of a bite out of the gain.
"What was unclear to my thinking is that fees are a percentage, so I assume even if she had started with $10,000 we would have lost $700 in fees instead of $70 and still made only 3 per cent profit after two years."
That's not correct. Most KiwiSaver providers -- except Kiwi Wealth, Smartshares and the Medical Assurance Society, according to www.canstar.co.nz -- charge not just a percentage fee but also a fixed membership fee, ranging from $23 to $50 a year.
In your daughter's fund, the membership fee is $30 a year plus 0.7 per cent -- which as ASB is quick to point out is low for a growth fund. In fact, Canstar has repeatedly given the fund an "Outstanding Value" rating.
But because there is a fixed fee, total fees hit people with low balances hard.
For example, in ASB's growth fund the annual fee:
• On $1000 is $30 plus $7, or 3.7 per cent.
• On $10,000 it's $30 plus $70, or 1 per cent.
• On $100,000 it's $30 plus $700, or 0.73 per cent. That's less than one fifth of the percentage fee on $1000.
It seems, then, that your daughter's account has suffered two blows. One is the effect of fees on low balances, and the other is bad luck in the timing of her $1000 kick-start. If she keeps contributing over the decades ahead, though, both of those will fade into insignificance.
The point ASB made to you about regular contributions is worth discussing. Anyone who contributes regularly to KiwiSaver -- or any other investment that rises and falls with market movements -- benefits from what's called dollar cost averaging.
Let's look at an over-simplified example. We'll say you contribute $100 a month.
When the markets are down, units in the fund might cost $10 each, so you buy 10 units in those months.
When the markets are up, units might cost $20, and you buy only five units.
The average unit price is $15 -- halfway between $10 and $20. But you bought more units at $10. So your average price is lower than $15. Great!
In some ways, then, a downturn is good news for regular contributors, as they buy at cheap prices. They just need faith that the markets will rise again. And they always do -- although sometimes it takes a while.
However, whether you want to contribute regularly for your daughter is another issue.
Unsurprisingly, ASB recommends it. "It is a great way to teach children about how savings can add up over time, and they'll get to see how those contributions impact their account balance during periods of market ups and downs."
That's a good point. Also, people under 18 are not automatically enrolled in KiwiSaver when they get a job. But if you've enrolled your child and they work part-time as a teenager, they are already in the scheme and hopefully will keep contributing -- all the way through to retirement.
On the other hand, people under 18 don't receive KiwiSaver tax credits, nor compulsory employer contributions -- although some employers contribute anyway.
And the money is tied up until the young person buys a first home. Because it can't be withdrawn for education, starting a new business or other purposes, some parents prefer to save for their children in another vehicle -- perhaps a similar non-KiwiSaver fund.
Once the young person is 18, though, things change. See the next Q&A.
Q: We enrolled our daughters in KiwiSaver while they were still at high school to take advantage of the $1000 kick-start. When they reached 18, but while still in study, we contributed $1043 a year to each account. Initially, of course, this got matched, but now gets the maximum $521 from the government.
When the girls started work, after completing their university degrees, they made their own payments, which were sufficient to generate the full government subsidy. In cases of partial years where this was not the case we topped up their total to $1043, after they had already voluntarily made their 4 per cent contribution.
The moral discussion on accessing the maximum government contribution I will leave to others. The outcome has been that by the time the girls started making their own contributions they already had about $7000 in their accounts. This was large enough to be quite exciting, and they like seeing it grow. We have hopefully started a lifelong savings habit.
A: Indeed. Contributing to a student's KiwiSaver account once they turn 18 is a great idea. To maximise their tax credit they need at least $1043 in contributions during each year ending June 30.
I don't think many would challenge the morals of this. The tax credit is there to encourage people into KiwiSaver, including young people. It would be lovely to see government help for those whose parents can't afford to do this, but that's probably dreaming.
It's great that you signed up all your daughters to KiwiSaver before the $1000 kick-start ended, last May. Now, without the kick-start, it's less clear that young children should join KiwiSaver. Other readers might want to weigh up the pros and cons in the previous Q&A. But, as you point out, by the time the young person is 18 it's well worth it for them to belong.
More on KiwiSaver for children next week.
KiwiSaver tax credit
Q: I've been paying into KiwiSaver for my wife over a number of years despite her not working. I missed a contribution to fulfil the required minimum contribution last year. (Big mistake!)
However, she turns 65 on June 25, and I wonder if contributions this year for KiwiSaver will still be eligible for the tax credit.
A: Oh no, not another KiwiSaver Q&A! To those who complain, we've had only one Q&A about KiwiSaver out of 24 so far this year, so it's about time for more.
This KiwiSaver year, ending June 30, your wife is eligible for a tax credit proportionate to how much of the year she is under 65.
In her case, if she contributes 359/365th of $1043 or more, she will get a tax credit of 359/365th of $521. That's so close to the full amount, you might as well not bother with the sums. In any case, she can take the whole lot out again once she's 65.
Don't follow the herd
Q: Your comment last week from Joe Kennedy reminds me of another quote from, I think, one of the Rothschilds: "The time to buy is when blood is running in the streets."
You're referring to Kennedy's remark, "I knew it was time to sell when my shoeshine boy gave me a stock tip." In other words, if everyone is buying shares, it's a good time to get rid of yours.
Your quote is addressing the opposite situation. Several online sources attribute the quote to Baron Rothschild, "an 18th century British nobleman and member of the Rothschild banking family", according to Investopedia. One source says John D. Rockefeller said it, but he was probably quoting Rothschild.
Anyway, the point that both men were colourfully making is it's not wise to follow the herd in investing.
Living on a boat With regard to recent letters about living on a boat, in the early 80s, when Whangarei was booming with the expansion of the Marsden Point refinery and a new money printing factory opened, there was a housing shortage in the city.
The "Town Basin" filled up with live-aboard yachties. I lived on board a 12m yacht with my husband and two primary-aged children and we were part of a unique community of similar families. At weekends most of us headed down the harbour, airing out our sails and our minds.
They were good times, but not without a flip side. With no facilities for emptying waste tanks most boats just emptied grey water and toilet waste straight into the river. There were regular complaints from house-dwellers about washing hanging out on boats and about the children, who used the riverside and adjacent reserve as their own personal playground (without incident, but a perceived nuisance).
The mooring area got so full it became difficult to manoeuvre boats in and out. I could go on.
The point I am making is that you can't just plonk a village of boat-dwellers into a community without considering infrastructure, social impact and unintended consequences. Someone must pay for a raft of additional facilities, and you will find that ratepayers will not be happy to contribute.
A: Thanks for making some good practical points -- from one who knows.