Whether you plan it or not – Retirement is a phase that cannot be avoided, nor can we escape or run away from it. It is bound to hit most individuals
Whether you plan it or not – Retirement is a phase that cannot be avoided, nor can we escape or run away from it. It is bound to hit most individuals at some point in time. One of the offerings available to help us create a retirement kitty is the KiwiSaver Fund.
KiwiSaver is a voluntary savings plan designed to help New Zealanders save for retirement or purchasing a new home. It’s never too early to begin planning for your retirement, and the earlier we start, the more the benefits of compounding are available at our end to amass wealth.
Kiwis can join KiwiSaver voluntarily at any time by signing up for an account with one of the approx 35 KiwiSaver providers. These providers are investment fund managers who include major banks, investment platforms, and boutique fund managers.
If you’re between 18 and 65 and looking to start your new job, your employer will automatically enroll you into the KiwiSaver scheme. At this point, you can choose to join a provider of your choice – if you don’t, you’ll be enrolled with either a default KiwiSaver provider (chosen by the government) or a provider chosen by your employer.
Selecting the Right KiwiSaver Fund
Selecting the right investment choice is one of the most important factors you must make while joining the scheme. This will determine whether or not you achieve your future financial goals. You should also be aware that the returns of KiwiSaver funds can vary over time and, in some cases, could be negative, flat, or range bound. Understanding how KiwiSaver funds behave and why will help you choose a fund that’s right for you.
There are several factors to consider when choosing a fund, including your investment goals, risk tolerance, and investment time frame.
The first step is to determine your investment goals, which may include achieving high returns, preserving capital, or investing in a socially responsible manner. Once you have identified your goals, you can assess your volatility tolerance to determine the level of volatility you are willing to take on. This will help you decide on the appropriate asset allocation for your portfolio, which may include a mix of stocks, bonds, and other investments. Your investment time frame is also important, as it can affect the type of investments you choose and the level of volatility you are comfortable with.
Characteristics of KiwiSaver Funds
The universe of the available KiwiSaver funds offers many investment characteristics. The characteristic of each fund is a reflection of the available mix of investments held in its portfolio. As with many investments, the most important thing to understand is its risk-reward frameworks and its bearing on future wealth creation opportunities. Generally, ‘growth’ investments, such as company shares, listed property securities and commodities, can generate higher returns over the long term. This is because, in the long run, the fundamental attributes of such investments follow their earnings trajectory.
As with every investment, a higher return is associated with higher volatility. These investments tend to experience greater fluctuations in value or increased volatility. Due to such nonlinearity, one is more likely to receive low or negative
returns during periods of market stress. On the other hand, ‘fixed income/interest bearing’ investments such as cash and fixed interest (or bonds) generate lower returns over the long term. They are less volatile than growth investments, reducing the likelihood of negative returns in the short term, but are likely to produce lower returns in the long run.
Time Period of Your Future Goals.
Your time in the market is more important than timing the markets. The more disciplined you are in your approach to investments, the more the benefits of compounding. It is suggested to have a clear period for the goals that you have started investing in. If saving for your retirement is your long-term goal, then you need a higher ratio of growth assets because even if there’s a market downturn, you will have plenty of years for your investments to recover. However, if you’re planning to purchase your first home in the next few years (short-term) or approaching retirement within a couple of years, you need a higher proportion of fixed income and cash assets. These assets will deliver a lower return but will have less volatility, protecting your portfolio from falling as much in value even if there’s a market downturn.
Past Performance of the KiwiSaver Fund
Many people commit the error of choosing funds based on past performance. Past performance does not guarantee that the said fund will be able to maintain its track record and perform in the future. One should look at how the fund manager has performed over market cycles. Consistency is the key to managing volatility. A fund manager who can be steady in market distress and capture the market uptrend should be the ideal choice. The investing world is split into two separate camps: the active world and the passive world. Passive investing is when a fund manager invests in a market index rather than picking individual stocks. Research consistently shows that very few investors outperform the market over the medium term, particularly after taking into account fees, so passive investing is becoming the norm rather than the exception
Fund Fees
Every fund manager has costs to incur. These costs are, to a certain extent, passed on to the investors in the said schemes. KiwiSaver schemes generally charge a management fee. Some of the funds may even charge a membership fee as well.
Management fees can vary between funds depending on the complexity of each fund. Some funds will charge a membership fee to recover some of the costs of administering the accounts and backend operations. The membership fee is a fixed amount and is at the discretion of the fund to be charged monthly.
The management fee is calculated as a percentage of your savings. The management fee is deducted from your investment returns. Some of the Growth Funds will have performance fees in place. If the fund performs above a certain threshold, then a portion of the return is given to the manager as a performance fee. This can make a significant difference.
Also, the type of investment portfolio of the fund would affect the fees charged. Funds with a greater allocation to growth investments (such as shares) will have higher management fees than funds with a greater allocation to income investments (such as bonds). This is because shares are generally more expensive to manage and research than bonds / Fixed income opportunities.
Despite the higher fees associated with funds with greater allocations to growth investments, these funds could be worth investing in as their net returns (after fees) are expected to be higher over the longer term.
Ultimately, selecting the right KiwiSaver fund requires careful consideration and research. It is important to understand the fund’s investment strategy, fees, and long-term performance history before making a decision. It is also helpful to seek advice from a financial advisor to ensure you make an informed decision that aligns with your investment goals and volatility tolerance.
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