Investing in a low-risk defensive KiwiSaver fund can provide slow but smooth sailing. Photo / 123rf
Q: I was diagnosed with a blood cancer seven years ago. Given the uncertainties this poses for my family and me, how should I structure my KiwiSaver?
The money is currently invested in conservative and balanced funds. But is this being too careful? I would also need to consider using the “serious illness” clause in the future to withdraw funds early if I require life-saving treatment. Thanks for your advice.
A: That’s tough. I’m sure you have many things to think about, but good on you for making one of them how best to handle your KiwiSaver money.
I don’t think you’re being too careful. It’s wise for anyone who doesn’t know when they will spend money – whether for a first home, in retirement or in your situation – to invest where the balance is not going to zoom up sometimes but also plunge sometimes, as happens in higher-risk growth or aggressive funds.
True, you miss out on higher average returns. But you don’t need the worry that the markets might be down at the very time you might have to withdraw.
If anything, you should perhaps move all your money into a lowest-risk defensive fund. These funds, sometimes called cash funds, typically invest in bank term deposits and the like. Investors’ balances usually just keep growing steadily. It’s slow but smooth sailing.
But if you want to be “in the market” to some extent, your current mix is fair enough. And perhaps you could encourage other family members to take a bit of risk with their KiwiSaver choices.
Note, though, that you may not be able to withdraw your KiwiSaver money when you want to. Inland Revenue says your health reason has to be either:
Some people have been turned down because they don’t quite fit the criteria. You can read about a woman in a similar situation to you on the Financial Services Complaints website, here: tinyurl.com/KSHealthWithdrawal
You might want to ask your provider about your eligibility before you count on it.
I hope the time ahead of you goes as well as possible.
Q: We hear much about the need to increase retirement savings, compulsory contributions to KiwiSaver etc – often from obviously self-interested providers.
Have you seen any analysis about whether more people are retiring with mortgage debt who wouldn’t have previously, or more debt than they would have had if they hadn’t been contributing so much to savings? Is everybody truly better off at retirement? It’s always presented as if it is a pure win.
A: You raise an interesting point. It must be true that at least some contributions to KiwiSaver would otherwise have gone into reducing mortgages or other debt.
While it sounds good to reach 65 with, say, $100,000 in KiwiSaver, nothing is gained if the person owes $100,000 more on their mortgage.
Actually, that’s not quite accurate. Because of the extra KiwiSaver input from the Government and employers, our person’s KiwiSaver balance would probably be higher than the extra mortgage debt.
But still, encouraging people – or forcing them by compulsion – to increase their KiwiSaver contributions would probably make people better off at retirement only if there are added KiwiSaver incentives. And they need to be genuine incentives, not increased employer contributions – as in this year’s Budget – that Treasury assumes will largely come out of people’s future pay rises.
There doesn’t seem to be any research specifically on this issue.
NZIER says 2022 research shows 66% of people 65 and over own their homes mortgage-free, 13% have a mortgage and 20% rent. It adds: “Less than half of Māori seniors and about one-quarter of Pacific seniors own their homes outright.”
It also says: “The number of people 65 and over with mortgage debt has grown from 118,000 in 2018 to 134,000 in 2022.”
Associate professor Susan St John, of the University of Auckland’s Pensions and Intergenerational Equity (PIE) research hub, doesn’t link that trend to KiwiSaver.
“While I think that we see more people coming into retirement renting, or with a mortgage, I don’t think there is evidence to attribute that to KiwiSaver contributions.”
However, Treasury seems to disagree. It assumes about 80% of the 2025 Budget increase in employee contributions to KiwiSaver “will come from a redirection of other forms of saving (eg, lower mortgage repayments or contributions to other investments)”.
Either way, St John sums up the situation: “Saving for retirement should not be viewed as an alternative to home ownership. It may mean that homes have to be more modest. It may mean governments have to increase attractiveness with subsidies rather than reduce them.” Hear, hear!
Q: In a Q&A last week you pointed out that the mortgage interest rate was, say, 5.5% and that the return on savings is “unlikely to be anywhere near 5.5%” – after tax and fees. True indeed.
However, the equation is probably even worse. Mortgage interest is paid with tax-paid money – so if the person’s top tax marginal rate is, say, 33%, the 5.5% mortgage rate is really 8.2%. You need to earn $8200 to have the $5500 after tax to pay the interest on $100,000. The mortgage interest rate is always way worse than it looks.
Unfortunately, mortgage interest is a case of the miracle of compound interest – but in reverse.
A: I think your point is that mortgage interest is not tax-deductible in New Zealand.
A 2023 OECD report on tax relief for home ownership lists 17 countries as giving some kind of tax relief for homeowners’ mortgage interest. They are Austria, Belgium, Chile, Colombia, Denmark, Estonia, Finland, Iceland, Italy, Luxembourg, Mexico, Netherlands, Portugal, Russia, Slovak Republic, Sweden and the United States.
Should New Zealand do the same? Wikipedia points out: “Most economists believe mortgage interest deduction is bad policy and is counterproductive. They note that it increases inequality, is an unnecessary market distortion, and contributes to housing unaffordability.”
While the idea has strong appeal for homeowners, New Zealand doesn’t really need to further encourage home ownership, which is already overrated as the only way to do well financially. Nor do we need more tax dollars flowing towards generally better-off people. So I’m afraid I’m not on that particular bandwagon!
Your final comment is really a different issue. But you’re right – interest on any debt compounds in the same way as interest on savings. It’s not uncommon for people to take out, say, a $400,000 mortgage and end up paying more than twice that over the years. It’s always a great move to cut any debt as fast as possible to reduce the compounding.
Q: With so many index funds tracking the same index, such as the S&P500, why don’t investors just invest with the fund offering the lowest fees? What other points of difference do funds offer?
A: I reckon the lowest fee should be the main basis on which you choose a fund. However, if you’re investing in KiwiSaver, there’s also data on which providers offer better services and that could sway your decision somewhat.
Here are the KiwiSaver providers that have told the Retirement Commission, in its regular services survey, that several or all of their funds are “passively managed in their entirety and track an index”: AMP, InvestNow, Kernel, Koura, Sharesies, SuperEasy and SuperLife, Also, NZ Funds’ Balanced Fund is passive.
Of these providers, NZ Funds got the highest score for services. Then came AMP, SuperLife, Koura, Kernel, Sharesies and, in a draw for the bottom slot were InvestNow and SuperEasy.
But of course many of their services might not interest you. If there’s a particular issue for you – perhaps ease of deposits or withdrawals – you can always ask providers if they offer it. Email or phone them, and if they don’t reply within a few days, cross them off the “good services” list.
You can compare the different funds’ fees using the Smart Investor tool on sorted.org.nz. Or use Sorted’s KiwiSaver Fund Finder to get an estimate of the total fees you will pay in each fund until you retire.
What if you want to invest outside KiwiSaver? Many of the above providers also offer non-KiwiSaver funds. And Smart Investor also ranks fees on non-KiwiSaver managed funds.
Another option is to use overseas-based funds. But that introduces complications with tax, settling estates and so on. It’s much simpler to use a New Zealand-based fund that invests in overseas indexes.
Q: Interesting stuff in last week’s column about low fees and index funds. I note you do though also emphasise diversification.
I recently switched from a major bank to a fund that allows me to split my KiwiSaver over several providers. So I can invest with Generate, Milford, Pathfinder and Nikko to name but four, and can do so in a mixture of conservative, balanced and growth funds. Thus my eggs go into many baskets.
The trade-off is of course higher fees. Would it be better to go with a pure index fund that has low fees? I like Buffett’s idea of 20% bonds and 80% index funds for people like me who are total amateurs. Which KiwiSaver provides this option?
A: Several KiwiSaver providers enable you to invest in a range of funds run by other providers. And it’s true that would give you further diversification.
But that comes at the price of simplicity. And you won’t necessarily get a higher total after-fees return, or less volatility.
The providers you name tend to offer actively managed funds, as opposed to the passive index funds discussed above. And their fees are almost always higher, sometimes a lot higher.
In any given year, some actively managed funds will perform better than the always middle-of-the-road passive funds, while some will do worse. But over time, it doesn’t tend to be the same ones that outperform. Looking at what has done well so far doesn’t guarantee their success will continue.
Passive funds, with their lower fees, tend to be the best bet. Choose one that follows an index with many shares in it, such as the MSCI world share index, and you will have wonderful diversification.
Q: I was surprised when you stated that most people invest in rental properties for the capital gain.
We purchased a two-bedroom, cross-lease property in 1986 only to provide extra income on retirement. If we sold the property now for the Auckland Council capital valuation we would receive more income from a term deposit at 4% than we do from our rental, even before deducting expenses, rates, insurance, agent’s fees, maintenance etc.
A: At the risk of sounding mean, why don’t you sell then?
I don’t really understand using rental property as a retirement investment – unless you are wealthy and enjoy being a landlord, or regard the property as your children’s inheritance.
But if you’re having anything less than a financially comfortable retirement, it doesn’t make sense to tie up all the money in a property when you could be gradually spending the proceeds from selling it, along with returns earned on that money in the meantime.
On your first sentence, I’ve looked through recent columns and I don’t think I’ve said that. I have, though, written that many new landlords find their expenses exceed their rental income, so they have to top up mortgage payments. Presumably they hope this imbalance will ease over time. But my guess is that many also hope to sell at a gain.
Q: The Financial Markets Authority administers the register of exempt employers of KiwiSaver. The full list is available to view on the FMA website.
A: You’re right. You can see the list here: tinyurl.com/ExemptEmployers
However, that list includes only employers who had qualifying employee superannuation schemes back in the early days of KiwiSaver, before November 2009, says the FMA.
“A scheme offered to employees by the employer had to have a minimum contribution rate of 4% of gross base salary of the member, which could be from either the member or the employer or a combination of both.
“Today only a new employee who joins the employment of an employer who holds exempt employer status and who is not already a KiwiSaver member would be covered by these provisions.”
The FMA list does not include employers discussed in last week’s Q&A, such as an employer that is not a New Zealand resident or does not carry on a business “from a fixed establishment in NZ”.
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.