I agree that term deposits are not ideal for most of the money. By the time the interest is taxed, you don’t get all that much growth over the years. The money might not even keep pace with inflation.
What about shares? I wouldn’t suggest you try to pick individual shares. If you’re really lucky you might do well, but you also might do badly. Even the professionals often get it wrong.
But a low-fee diversified share fund, a type of managed fund that holds many shares, is a good idea. Usually you get considerably higher long-term returns than on term deposits.
Most aggressive and growth KiwiSaver or non-KiwiSaver funds hold largely shares. If you look at these funds on the Smart Investor tool on sorted.org.nz, and click on each fund’s name, you get a summary of what they invest in.
There are two “conditions” for investing successfully in a share fund:
- You don’t plan to spend the money for at least 10 years. You tick that box. And some of your money – to be spent later in retirement – might be invested for several decades.
- You can cope with seeing the balance fall – it could even halve or worse – at some stage along the way. The investment will recover, but it might take a year or more. You must be able to stick with the investment through thick and thin, rather than panicking and reducing risk at just the wrong time.
If you’re not sure about coping with volatility, perhaps use a balanced fund. These typically hold lots of bonds as well as shares and will probably be less volatile. However, the returns are likely to be lower – although still generally higher than term deposits.
Once you’ve chosen your risk level, you need to make two decisions.
The first is whether to use your KiwiSaver fund or a non-KiwiSaver fund. The latter will give easy access to your money, but the fees may be higher.
The second decision is about fees. You’re right that some managed funds charge high fees, but others don’t. Do you get more if you pay more?
A recent media report said some higher-fee KiwiSaver providers had reported good returns, so perhaps it’s worth paying extra.
My response: Looking back over any period, whether it’s three months or 10 years, there will always be some high-fee funds that came Top of the Charts. The only problem – and it’s a big problem – is that nobody knows which ones will keep doing well. The stars of one period often turn out to be the dogs of the next period.
I think it’s better to go with low-fee funds, which usually simply invest in all the shares in a share market index. Because of this middle-of-the-road strategy, they almost never feature among the top performers. But they also don’t feature at the bottom.
Index funds can charge low fees because they are cheap to run. When you look at average after-fee performance over the years, they are a better bet. I’ve invested in index funds since I first heard about them in the United States in the 1970s, and I’ve never regretted it.
To find low-fee funds, use the Smart Investor tool. Click on KiwiSaver or non-KiwiSaver funds and then choose the risk level you want. If you sort the funds by “Fees (lowest first)”, you can then choose from amongst the first few low-fee funds.
Beyond the banks
Q: Opening a joint account at a non-bank finance company is no easy hurdle.
Their requirements include filling out and sending a form and a bank statement. Then “a text will be sent to both mobiles asking you to complete the verification process using a NZ/AU driver’s licence or NZ/AU passport.” Then you transfer the money from your bank.
This is no easy matter for us. We don’t do texts and have no cellphones. We haven’t yet explored alternative verifications with the finance company.
We initially picked them because they have had the highest credit rating of all the Reserve Bank-listed finance companies: BBB. The rest were junk-rated or had no listed rating.
A: You’re responding to my comment last week in a Q&A about the new Depositor Compensation Scheme. I said: “You may want to put some of your money in the riskier providers, such as finance companies, that tend to pay higher interest — now that you won’t lose the money if the provider fails. Note, though, that if that happens, it may take a while for you to get your money.”
Looking at a bank, finance company or other deposit taker’s credit rating is a good way to get a feel for their financial strength. You can see the ratings on interest.co.nz’s Savings page. I recommend you also read the “Credit Ratings Explained” article there. You’ll see there that some B ratings are not great, and a C rating is a worry.
Meanwhile, you’re finding it’s not so easy for you to open an account. Don’t despair. I suggest you phone or email the finance company. I would be surprised if they can’t accommodate you.
Health insurance fan
Q: Unlike your correspondent from last week, we went the other way with health insurance. I’d had both shoulders done, a hip and heart surgery. But, come 65 and wondering about further joint operations, I took out health insurance. My wife had had no operations, but she took it up as well.
Our answer to affordability was to take a $4000 excess, which lowered premiums significantly. This precludes coverage for a lot of minor ops, but all the expensive stuff is covered. The $4000 (plus premiums) is worth paying, if you can afford it, to get the op as soon as you need it and to save on premiums.
A: Well done. And you’ve presented a great example of what the next correspondent is talking about.
The best way
Q: There were several recent questions regarding health insurance and the alternative of “self-insurance” – when you save what would have been insurance premiums in a fund to cover your health expenses. The following comments apply to any type of insurance and are from a purely statistical viewpoint.
On average, people would be better off self-insuring everything, because the average amount paid out in insurance claims is less than the average amount of premiums.
But insurance is not about “on-average”, it is about protecting you from the un-average event which could have devastating consequences.
Where self-insurance can be beneficial is to cover smaller costs. For example, it is unlikely that over the years you will visit the GP so many times that the cost will be greater than the extra premiums you would pay to have that cover. Even if you were unlucky, the difference is unlikely to have had material consequences.
The same applies to selecting the highest excess you can comfortably tolerate for any type of insurance.
If you follow this strategy across all your insurance, and each year invest the saved premiums, there is a high probability that you will be better off in the long run, without the risk of severe shocks along the way.
A: I couldn’t have said it better myself! I saved your email until last on the topic of health insurance, as it brilliantly summarises the best approach.
Not everyone
Q: You published a letter that implies we all get NZ Super at age 65. But there are other criteria to be met. I won’t be eligible at 65 after the Government changed the residence time in New Zealand. For those who aren’t eligible for Super, it could be argued that employers should still have to pay into KiwiSaver.
Also, I do think anyone working should not be discriminated against on age, so get the same benefits as other workers. Most people working past 65 will be doing it for the money, particularly lower-paid workers who don’t have much retirement savings.
A: Sorry, but I can’t see making employers pay extra to people who have lived for long periods overseas and so don’t qualify for NZ Super at 65 – noting that most of those people will receive the pension when they are older.
Your age discrimination argument is stronger. It’s not correct that most working 65-plusers do it mainly for the pay. About 36% do, according to the Retirement Commission, with the rest motivated mainly by social and other reasons. Still, for those 36%, losing employer KiwiSaver contributions at 65 is tough – if that, in fact, happens.
Many employers simply continue their contributions regardless of age. As one said to me, “I’m not going to say, ‘Happy 65th! Our contributions to your KiwiSaver have now stopped’.”
Fundamental issue
Q: Re your comments on total remuneration over the past two weeks, it seems that a fundamental issue is being overlooked.
Private sector employers generally pay “fair market rates” to their employees in order to attract and retain the quality of staff they require.
To establish an appropriate market rate for each position, they consult reputable remuneration survey companies to obtain market information on a “total cost to the company” basis, including the employer’s contributions to the employee’s superannuation fund (eg, KiwiSaver).
Hence, it’s completely appropriate to take account of those contributions when establishing fair salary levels, otherwise it wouldn’t be an apples-to-apples comparison. This means an employee who opts out of KiwiSaver will likely receive a higher base salary than an employee who opts in.
Your suggestion that employers have a moral obligation to encourage their employees to participate in KiwiSaver is moot because it’s actually Government’s role to incentivise individuals and companies to act the way it wants by using tools such as legislation, subsidies and tax incentives. So, wouldn’t it be most fair to give ANZ a break on this matter?
A: I haven’t said employers are obliged to encourage KiwiSaver participation. Many good employers do, but encouragement is not required.
But I do think employers are morally – although not legally – obliged to pay employer KiwiSaver contributions, rather than effectively taking the money out of an employee’s take-home pay under a total remuneration approach.
Note that employers were brought into the KiwiSaver fold gradually. In July 2007, when the scheme started, they paid nothing. From the following April, it was 1% of pay, and from April 2008, it rose to 2%. Employer contributions didn’t rise to 3% until April 2013, five years later.
So employers have had plenty of time to adjust. And, as has often been observed, many employers have probably simply given smaller pay rises to take into account the extra expense.
Every New Zealand resident can take part in KiwiSaver, so it’s not unfair to give employees in the scheme more total pay.
True, many KiwiSaver members are not contributing, presumably because they don’t think they can afford to. But there’s nothing to stop an employer continuing to put money into non-contributing employees’ accounts if they are going through hardship. Policies like that can boost employee loyalty.
Enough! As with all moral judgments, there will be people who disagree with me. That’s fine.
Perfectly fair
Q: As a former employer, I considered that KiwiSaver contributions were perfectly fair in terms of total remuneration, as it was a benefit available to everyone if they chose to take it up. No different in principle to offering free flu vaccines and other employee benefits.
To provide a “cash-up” option totally defeats the purpose of KiwiSaver, in my opinion, and I am very surprised that some large companies have chosen to do so. Not on my watch!
A: I like your attitude. And, by the way, you ran a company with hundreds of employees who benefited from it. Good on you!
* 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 [email protected]. 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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