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OPINION:
Q: I have just read your last column, particularly the KiwiSaver WOF, which is excellent. It has motivated me to write to you about two KiwiSaver issues.
First, I saw recently where the Retirement Commissioner is recommending to scrap the $521 bonus that the government pays all contributors if they save at least $1042 into their accounts each year.
Apparently it may not be an "incentive" any more. I think this is crazy. In my experience with myself, my husband, our three young adult children and other friends it is definitely an incentive — a huge one. It also gives you a minimum "target" to aim for each year. I think it would be a huge "disincentive" if it was discontinued or made more difficult to get.
Second, as a woman who has had children, I think a lot more needs to be done to encourage women who are taking time out of the paid workforce to raise children to keep contributing, ideally $20 a week, or $87 a month, while they are most assuredly "working" at home.
Young mothers I know say they will start KiwiSaver again when they go back to work — but this could be any number of years. There seems to be a feeling that KiwiSaver is only for those in paid employment when in fact it is for all of us.
They may not get the 3 per cent employer payment but I feel they should definitely keep their accounts going if at all possible and get all or part of the government contribution.
A: You've misunderstood what the Retirement Commission — Te Ara Ahunga Ora — is suggesting.
"The 2019 KiwiSaver recommendation wasn't questioning whether the government contribution was an incentive, but whether it was incentive enough," says Tom Hartmann, personal finance lead at the commission.
"At present any employee earning over $34,762 gets the full $521 of government money automatically alongside their employer contribution — they don't have to save anything more to get it.
"The proposal at the time (still being considered, but not a fait accompli by any means) was to grant people at least $2 for every $1 they put in (so four times the current 50 cents for every dollar) for voluntary contributions — top-up money they put into their KiwiSaver." This would apply for employees, the self-employed and everyone else.
If the government felt this would cost too much, the incentive could be given for up to 12 years and then stopped.
"The idea was for the government to get more bang for its buck and incentivise saving in a more targeted way," says Hartmann.
He adds: "We're glad that the current incentive is working for you, although it may give you the wrong impression that these amounts saved will meet your long-term lifestyle goals — best to run our KiwiSaver calculator on Sorted to gauge whether you'll get enough out of it."
On your second point, I agree that it's a pity when mothers caring for children stop contributing. The Retirement Commission's proposal would certainly give them — and anyone else out of the paid workforce — more incentive to keep putting money in.
Read on for more about people not making the most of KiwiSaver.
Q: Re "the many thousands of people who are currently on savings suspensions" mentioned in your column on July 9, I wonder how many of these thousands are like me — people with other superannuation schemes.
In my case I get my employer contributions through my teacher superannuation fund and keep continually taking a contributions holiday in KiwiSaver and just contribute the minimum needed to receive the government's maximum of $521 a year.
I'm guessing the extent of the circumstances of the thousands currently on savings suspensions isn't known?
A: I don't think there's any research on why the 100,800 KiwiSaver members currently on savings suspensions have chosen to stop making contributions.
Your reason is a valid one — that you receive the same or higher employer contributions through another work pension, and you make sure you still receive the maximum KiwiSaver government contributions.
But non-KiwiSaver work pensions are becoming increasingly uncommon. I expect most people on savings suspensions took that step because they were struggling financially. But are they still?
In April 2019 the name was changed from "contributions holiday" to "savings suspension", in the hope that the idea would look less appealing.
At the same time, the maximum suspension was changed from five years to one year — although you can reapply after a year, and do that repeatedly. The majority of people had been taking a five-year break, and the thinking was that their circumstances might later improve but they were still missing out on KiwiSaver. Having to renew each year might prompt some to resume contributing.
The stats suggest this has worked pretty well. At the time of the change, the number of people on suspensions was approaching 140,000 — so it has now dropped about 28 per cent.
Q: What time does it take for investments to double? Five, 8, 10, 15 years? Or they may sometimes go down! Could you show a chart to demonstrate the rises and falls?
A: How long it takes for an investment to double depends on the return — interest, dividends, rent or capital gains — it is earning. The higher the return, the faster the doubling.
A useful calculation, which gives you a close enough number, is called the Rule of 72. It works like this:
• If an investment earns a return of, say, 8 per cent, divide 8 into 72 and you get 9. That investment will double in 9 years.
• If the return is 6 per cent, divide 6 into 72 to get 12. The investment will double in 12 years.
• If the return is only 2 per cent, it will take about 36 years to double.
You can also use the Rule of 72 the other way. Let's say you know your investment has doubled in 10 years. Divide 10 into 72 and you get 7.2. The average return on the investment has been about 7 per cent a year.
As you say, investments sometimes lose money. But over 10 years or more, most property, diversified shares, KiwiSaver or other managed fund investments grow.
Our chart shows the S&P/NZX50 index of the biggest 50 shares in the New Zealand market. The index starts at a level of about 1900 in March 2003 and doubles to 3800 by November 2006 — in less than four years. The Rule of 72 tells us the average return in that period was more than 18 per cent a year. Impressive.
However, soon after that, the global financial crisis brings the index down and it falls for almost two years before recovering. We don't double the November 2006 index figure — to 7600 — until June 2017. That's more than 10 years. Divide that into 72 and you get an average return of about 7 per cent through the up-down-up 2006-2017 period.
Since then, we saw a strong market rise, the short sharp 2020 Covid dip, a healthy recovery and then a slide. Who knows when we'll double the index again?
The Rule of 72 works for any type of investment. But it applies only if you invest a lump sum at the start and make no further contributions. For example, it doesn't work with KiwiSaver. The rule also applies to:
• Inflation. When inflation was 2 per cent, it would take 36 years for the value of, say, $1000 to halve. If the current 7.3 per cent were to continue — please, no! — it would take only 10 years for the value to halve.
• Debt. Let's say you have a 20 per cent credit card debt and make no payments. Divide 20 into 72. Your debt will double in about three-and-a-half years. That's scary.
Calculations with the Rule of 72 are only approximate. They work best for returns of around 6 to 10 per cent. Once you get below 3 per cent or above 15 per cent, your answers are a bit rough. For example, if your house value has doubled in just two years, your annual return is actually about 41 per cent, not 36 per cent. But in most situations the rule is good enough.
Q: I have a five-year term deposit taken out in 2017 at 4.30 per cent, maturing next month. If it had matured last year, I would have had to renew it at around 2 per cent (even less for shorter terms). But now I can get 4.50 per cent for five years.
Sometimes planning is pure luck of the draw, eh?
A: Indeed. I don't think you can take credit for that timing!
But there's a good way to make sure you don't leave this up to luck next time around. It's called laddering, and I've written about it before, but it's worth repeating — especially in these volatile times.
The idea is to spread out your term deposit money — or bonds. You invest, say, one fifth of the money for one year, another fifth two years, and so on up to five years. Then, as each deposit matures, renew it for five years.
This gives you two advantages. After you've got it set up, all your deposits will be for five years, so you get the usually higher interest rates offered on longer-term deposits. But you have access to some of the money every year.
Sure, some of your money will mature in times of low interest. But with some you'll be lucky. It beats having bad luck with the lot.
Q: I have recently turned 65. I work 32 hours a week. While I continue to enjoy my job I shall keep working.
My KiwiSaver is in a conservative fund. I have lost $5000 since Christmas. My dilemma is, should I stay in it not knowing how much longer I am going to work and perhaps keep losing money for another couple of years until the market improves? Or should I transfer it into a bank account where I realise the interest is poor but at least I won't see my balance going down each month?
A: Letters like yours keep coming in, and each situation is a bit different.
I wonder if you realise that conservative funds are not at the lowest risk level. They usually invest largely in high-quality bonds, which are fairly "safe" investments — very few are likely to default. But the recent unusually rapid interest rate rise means older, lower-interest bonds are worth less than before. Fund managers have to value these bonds at lower prices, and so your balance drops.
In due course, when interest rates settle down and the older bonds mature, conservative fund returns will improve. But nobody knows quite when. And in the meantime, returns could fall further.
If you expect to spend at least some of your KiwiSaver money within two or three years, it's probably best to move that amount to either bank deposits or a lowest-risk KiwiSaver cash fund. Your provider might have one, or you can find cash funds among the lowest-risk Defensive Funds in the Smart Investor online tool. Look for a fund with "Cash" in its name, then check that its investments are all or nearly all cash by clicking on "Mix".
Note, though, that moving into a lower-risk fund or bank deposits at this stage means you are making your losses real. So if you don't expect to spend some of your KiwiSaver money for, say, three years or more, it would be good to keep that in the conservative fund, which will eventually recover.
When you get within three years of spending it, move it to your cash fund or bank deposits.
- 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 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 mary@maryholm.com. 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.
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