Kiwisaver Strategy

[Aaron]

Having a background in finance, i'm not at all impressed with the whole NZ Kiwi Saver approach (keep in mind i'm speaking finance from a N. American point of view). Can you believe the insult I felt when speaking to countless of financial advisors in NZ when they could not tell me a clear cut example WITHOUT the advice of a SEPARATE TAX advisor? I questioned on tax minimisation and efficiency of the investments and they could not comment directly about taxation (regarding rules about FIF and FDR etc). Where I studied, attaining a CFA designation always accounts for taxation (meaning the person not only has to know accounting, but also taxation). It's a complete joke that the NZ advisor would charge out a fee for their service + another fee for a tax advisor. Just utter rubbish to think an investment advice does not include tax advice.

Anyways, coming from the Buffet and Munger side of investing, i'm not convinced the 3% matching will cover the fees in Kiwi Saver on a "cumulative basis" over say 10 or 20 years. Buffet has won his wager bet last year that no hedge (or actively managed) fund could beat the market index (S&P500) and he presented this at his Berkshire annual meeting last year. What purpose does a Kiwi managed fund service when they just buy the low cost Vanguard ETF? Sounds like the bureaucracy that NZ investors would be subjected to under the FDR/FIF if they bought Vanguard funds directly.

The $521 tax credit? That's called a bribe in my books.

There is a real reason why share investing isn't a hot topic for NZ. The reason is that you have an asset class (real estate) where the capital gains can be untaxed. Now recent news says the Labour Gov't will introduce a CGT to address this issue but the opposing National Party may remove it if they win the next election. Either way, when you talk about the realm of investing, one CAN'T speak without the issue of tax minimisation and my crystal ball think the NZ equity market pales in comparison to the US equity market (from a risk reward point of view). But what am I to judge? We have high paying 'actively manged' Kiwi Saver funds that would tell Buffet and Munger is wrong.

$521 tax credit, bribe or incentive call it what you will. Probably not huge in the greater scheme of things.

I would strongly disagree with your statement "i'm not convinced the 3% matching will cover the fees in Kiwi Saver on a "cumulative basis" over say 10 or 20 years."

My thought processes might be wrong but the only way you could be worse off is if fees were more than 100% of invested funds. I think they are probably around 2%.

Maybe you could give an example of your reasoning behind this statement as I must have missed something.

[mfd]

$521 tax credit, bribe or incentive call it what you will. Probably not huge in the greater scheme of things.

I would strongly disagree with your statement "i'm not convinced the 3% matching will cover the fees in Kiwi Saver on a "cumulative basis" over say 10 or 20 years."

My thought processes might be wrong but the only way you could be worse off is if fees were more than 100% of invested funds. I think they are probably around 2%.

Maybe you could give an example of your reasoning behind this statement as I must have missed something.

You're not quite right - the 100% return only applies year 1, but then that money is nibbled at by fees potentially for 40 years. If you're paying too much, you could easily see the initial doubling being eaten away at. For example, if I invest $100 a year for 40 years and receive a net 7% return after tax/fees I end up with something like $20k. If I contribute $200 a year (employer doubling) for 40 years and receive a net 4% return, I only end up with $19k despite contributing twice as much. That said, this represents a 3% fee which is much higher than I've seen for Kiwisaver funds.

My Kiwisaver approach is to put in my 3%, I get 3% from my employer and $521 from the government. This goes into the cheapest general share fund I can find. If I could stick it straight into Vanguard or some other cheap index fund I would, as it is I currently pay Simplicity 0.3% to do this for me. Not ideal, but I'm happy the fee is low enough that the matched contribution + government addition will leave me significantly richer than investing in a similar but cheaper fund outside Kiwisaver.

[Aaron]

You're not quite right - the 100% return only applies year 1, but then that money is nibbled at by fees potentially for 40 years. If you're paying too much, you could easily see the initial doubling being eaten away at. For example, if I invest $100 a year for 40 years and receive a net 7% return after tax/fees I end up with something like $20k. If I contribute $200 a year (employer doubling) for 40 years and receive a net 4% return, I only end up with $19k despite contributing twice as much. That said, this represents a 3% fee which is much higher than I've seen for Kiwisaver funds.

My Kiwisaver approach is to put in my 3%, I get 3% from my employer and $521 from the government. This goes into the cheapest general share fund I can find. If I could stick it straight into Vanguard or some other cheap index fund I would, as it is I currently pay Simplicity 0.3% to do this for me. Not ideal, but I'm happy the fee is low enough that the matched contribution + government addition will leave me significantly richer than investing in a similar but cheaper fund outside Kiwisaver.

What I was thinking is if you don't join kiwisaver you don't get the 3% employer contribution. This is every year and is money you otherwise would not receive so fees would have to be more than 100% to negate this.

[mfd]

What I was thinking is if you don't join kiwisaver you don't get the 3% employer contribution. This is every year and is money you otherwise would not receive so fees would have to be more than 100% to negate this.

The issue is, your money is only doubled once when it's put in. The fees apply for years, or even decades. The maths is compound interest in reverse, which we all know is a powerful effect when you give it time.

Think of what happens in, say, year twenty. Your contributions are only maybe 2-3% of your total balance, so your employer contributions only add 2-3% to your balance. If you were paying 3% fees, this would totally counteract your employer matching.

Luckily, high fees are optional. SBQ, no argument that some companies charge silly amounts, anything above 1% is very hard to justify. Fees are coming down as scale increases, I'm paying 0.3% now and hopefully this will come down further in the future. At that level, you'd be crazy not to snap up the perks by putting in minimum contributions. My savings above 3% are invested elsewhere.

For long term returns I'd recommend interest.co.nz who publish comparisons every so often.

https://www.interest.co.nz/kiwisaver...ket-volatility

[Baa_Baa]

"The recovery showed a market downturn was the worst time to switch funds, Murphy said. “It demonstrates the importance of long-term investment strategies for what is supposed to be a long-term investment.”

[SBQ]

"The recovery showed a market downturn was the worst time to switch funds, Murphy said. “It demonstrates the importance of long-term investment strategies for what is supposed to be a long-term investment.”

Utter rubbish! The problem with all these stated figures is they make unrealistic assumptions. One being you can not assume the market return a static ie. 5 or 6% return compounded until the person retires nor can any advisor be held accountable if their investment plan does not work out. Believe me, these advisors are very good at tweaking things and pitching scenarios to their clients... but will never admit any fault.

“It really does demonstrate the importance and power of people not trying to market-time.”

People who pulled out of growth or aggressive funds in March, worried about the future, would have both locked in the losses their funds experienced that month", and missed out on the rebound experienced since. "

The article also doesn't say WHY individuals would switch from aggressive to conservative? Based on what logic? Do we assume the individual is scared and rather than 'risk' losing more by staying in the aggressive fund, they feel they want to go to a lower risk fund? What if there was no recovery and it proved the conservative funds fared better than the aggressive funds?? Sounds to be (like all these articles), they're cherry picking based on a hindsight 20/20 scenario. If you ask all of the top long time running stock pickers, from Buffet to Ray Dalio, to any reputable fund manager, they ALL agree that timing does matter. They also do not believe holding bonds, to any long term certainty, is a wise plan to reach retirement. Buffet has never been a big fan of investing into junk bonds but would gladly underwrite the terms of such bonds in his favour.

I've mentioned before, the whole problem of NZ's Kiwi Saver is the lack of any real financial advice and the absence of how funds manage their risk levels between portfolios. That is the difference between say an aggressive vs a conservative is mainly due to the % holdings in bonds or interest bearing assets in each portfolio. An aggressive fund would have a low allocation of cash & bonds while the low risk funds would have a very high % of holding cash and bonds. This is very different to the managed funds over in N. America where financial advisor point you to reputable mutual funds that specialise in that area. Out of the 5000+ managed funds you can pick, no financial advisor is going to pick ONE family of funds that so happens to have various portfolios and let their clients choose in between the risk categories.


I'm still waiting for Stuff to report the huge tax difference between investing in NZ residential properties vs investing in Kiwi Saver funds. Not even Ms Ardern could address this problem by not allowing CGT.

[Baa_Baa]

"The recovery showed a market downturn was the worst time to switch funds, Murphy said. “It demonstrates the importance of long-term investment strategies for what is supposed to be a long-term investment.”

"The problem was that many of those investors sold out of things like shares at the low point of the market, when they were worth less than they had been for years. They then shifted into funds that largely invested in things like term deposits and cash – and weren’t in the market when it rebounded afterwards.Some switched back but it was too late to save the lost money.
This has made a tangible difference to balances, and to the end result that many of these people will have at retirement. One financial adviser estimated that people who panic-sold missed out on combined $3.5 billion in retirement savings."