Around this time each year, KiwiSaver members receive their annual statements. We sat down with Peter Forster to talk KiwiSaver projections, investment markets, diversification, and what’s ahead.
1. How are KiwiSaver account balances looking?
The past financial year has been filled with ups and downs for KiwiSaver members, and for investors globally. Interest rates are significantly higher than what we’ve become used to, and we’ve seen all asset classes reprice as a result. This includes assets like shares and bonds both here in New Zealand and across international investment markets. Repricing of these asset classes means a direct impact on KiwiSaver account balances.
Encouragingly, markets are now showing signs of resilience. We’ve seen strong performance across all asset classes over the past six months, and investment market returns have recovered most of their earlier losses.
2. What can people do if they’re concerned about their KiwiSaver projections?
You have a few choices when it comes to the size of your retirement savings. These include your choice of fund, your contribution rate, and how long you contribute for. Here are a few things to consider if you’re concerned about your KiwiSaver projections.
- Focus on the long term. Keep in mind that KiwiSaver is primarily a retirement savings scheme. It can be unsettling when your balance points downwards, but for most people, time is on your side, and history tells us that markets recover. Staying the course with your investments is the best way to grow your savings over time.
- Keep up with your contributions. With high inflation it can be difficult to manage your everyday finances but bear in mind that contributing at least 3% of your before-tax pay has a big impact on your KiwiSaver projections. If you’re a wage or salary earner, usually your employer will match this by contributing 3% of your gross earnings on top of your regular pay.
If you’re self-employed or contracting, it’s important to make regular voluntary contributions to your KiwiSaver account throughout your working years. This will also mean you maximise your annual Government contribution, which may make a big difference to your retirement projections.
- Make sure you’re in the right fund for you. Being in the right fund means you’re in a fund that will deliver the best possible return for you, with consideration for your risk appetite and investment time horizon. If you have 10 years or more until you need to access your funds, a more growth-oriented fund will usually deliver a higher return over the long run. However, over the short-to-medium term, you need to accept that your balance will go up and down more along the way.
The potential impact of fund choice on your KiwiSaver savings*
The assumptions used to calculate these projections are set out at the base of this article*.
3. Why does diversification matter for KiwiSaver members?
Diversification allows you to spread your investments across different asset classes, sectors, and geographies; reducing the chance of losses if one asset or sector performs poorly. This matters for KiwiSaver members because when you’re talking about your retirement savings, the loss of a material part of your investment can compound significantly over the long term.
We have some providers now offering self-managed KiwiSaver portfolios, which means their members can choose to invest in specific companies. This can lead to a lack of diversification for their KiwiSaver savings and the portfolio can suffer as a result. KiwiSaver is primarily a retirement savings scheme, and over the long term, the compounding effect of those losses can make a big difference. Volatility also tends to be higher with these portfolios.
The question investors need to ask themselves is this:
How will I get proper diversification across geographies, across currencies, across industries, and sectors so that my investment will perform in the long term?
We believe the answer is to have a well-diversified investment portfolio. That’s why BNZ KiwiSaver Scheme funds have a mix of growth assets (mainly shares) and income assets (mainly bonds). The exception is the Cash fund, which only invests in a wide range of cash and cash equivalent assets.
4. What’s ahead for investment markets?
Company earnings are going to be an important driver for how markets perform over the next 12-18 months. We expect a considerable amount of market volatility over this time period, as interest rates are likely to start coming down and markets rebalance.
Across global share markets, corporate balance sheets are pretty strong and the effects of inflation have largely, to this point, been passed on to consumers. However, we could tip into more of a recessionary environment, where we would expect to see higher unemployment and less favourable company earnings.
This has been an uncertain time for investors, but in the long run, investors get rewarded for staying the course and bearing risk during periods of market uncertainty. It’s important to remember that recessions and market downturns are not permanent states, but rather cyclical and all part of the broader economic landscape. Despite recessionary headwinds, many companies have built up strong reserves and improved operational efficiencies, and these companies are well-positioned to weather economic downturns. Such resilience often translates into continued dividends and potential gains for investors.
While there may be some bumps in the road ahead, it’s crucial to stay focused on your long-term financial goals. By maintaining a diversified portfolio and sticking to your investment strategy, you can navigate through periods of volatility and position yourself to benefit from the eventual market recovery.
† The Balanced Fund uses a combination of active and passive management across the Australasian Equities sector of its portfolio, while the Default Fund passively manages this sector. Over the long term, the Balanced Fund has the potential to outperform the Default Fund as a result.
The Default Fund has a lower annual fund charge compared to the Balanced Fund.
*Assumptions used to calculate these projections:
- The ‘amount saved’ value is in today’s dollars so you can compare with the cost of living today.
- The results shown are not guaranteed to occur, this is simply information to help you understand how choices you make may affect the value of your KiwiSaver savings and retirement income.
- These projections are based on a hypothetical KiwiSaver member who is 30 years old, has a $25,000 KiwiSaver account balance, earns $80,000 gross annual salary, makes 3% employee contributions, and receives 3% employer contributions.
- The financial results are for illustration only and are based on several assumptions. The results are therefore unlikely to reflect an actual balance or actual retirement income. For example, actual investment returns may be different, and are likely to move up and down due to investment and other risks. Returns may be negative over some time periods.
- This information is not intended to provide financial advice. Accordingly, the results should be treated as a guide only and not as financial advice.
- The retirement projections are based on assumptions set by the Government. A summary of the Government’s assumptions is provided below, however, further details can be found on the Financial Markets Authority website.
- To the extent permitted by law, neither BNZ nor any of its related parties accept any responsibility or liability arising from the use of this information.
- References to third party websites are included for convenience only. BNZ (including any of its related parties) do not accept any responsibility for the availability and content of such websites.
In addition, the balance and income calculations shown are based on the following assumptions:
- Salary assumed to increase by 3.5% each year.
- No savings suspensions are taken.
- No amounts are withdrawn for first home purchase or financial hardship, or (for the purpose of estimating the weekly income amount) as a lump sum after age 65.
- You receive an annual Government contribution of 50c for each dollar you contribute, up to a maximum of $521.43 a year (from 1 July to 30 June).
- You remain in the stated fund until age 65.
- The rate of return for the stated fund is shown in the table below. The rates of return are:
- After tax of 28%.
- After fees. The fees used are an average for the fund type and don’t reflect the actual fees you pay.
- After 65, the balance will earn a 2.5% rate of return each year (after fees and tax).
- The projections are adjusted for inflation, and the inflation assumption is currently 2% per annum.
- For the income amount, you will make regular withdrawals over 25 years (i.e. until age 90) when your balance reaches zero.
- Return after fees and tax have been deducted:
|BNZ KiwiSaver Scheme Fund||Mix % in growth assets||Assumed rate of return (after fees and tax)|
|Conservative Fund||10 – 34.9%||2.5%|
|Default Fund||35 – 62.9%||3.5%|
|Balanced Fund||35 – 62.9%||3.5%|
|Growth Fund||63 – 89.9%||4.5%|
Any views expressed in this article are the personal views the author and do not necessarily represent the views of BNZ, or its related entities. This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser.
Neither Bank of New Zealand nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, information, representation or omission, whether negligent or otherwise, contained in this article.
BNZ Investment Services Limited, a wholly owned subsidiary of Bank of New Zealand, is the issuer and manager of the BNZ KiwiSaver Scheme. A Product Disclosure Statement is available at bnz.co.nz Investments in the BNZ KiwiSaver Scheme are not bank deposits or other liabilities of Bank of New Zealand (BNZ) or any other member of the National Australia Bank Limited group. They are subject to investment risk, possible delays in repayment, possible loss of income and possible loss of principal invested. No person (including the New Zealand Government) guarantees (either fully or in part) the performance or returns of the BNZ KiwiSaver Scheme or the repayment of capital. National Australia Bank Limited, the ultimate owner of BNZ, is not a registered bank in New Zealand but a licensed bank in Australia and is not authorised to offer the products referred to in this article to customers in New Zealand.