Analysis: According to Stats NZ, a man turning 65 can expect to live to 84.7, and a woman to 86.8. That's roughly two more decades of groceries, rates, power and water bills, and the odd flight to see the grandchildren.
Twenty years is a long time to be invested. Even KiwiSaver has only been around for 18.
Kiwis have worked part of this out already. The FMA's most recent KiwiSaver report shows those over 65 have stopped emptying their accounts the moment they are allowed to. Withdrawals by that group fell 14.1% in a single year, from 36,652 to 31,470, even as more people became eligible. About 197,000 people over 65 still hold money in KiwiSaver, up from 184,000 the year before. They are, smartly, treating it as an income source.
But our investing patterns have not caught up with this behaviour. In a study for the Retirement Commission covering 89% of all KiwiSaver members, Melville Jessup Weaver counted where the money actually sits. Among 31 to 50-year-olds, funds in the growth, aggressive, and shares categories make up 63% of balances. For those aged 51 to 64, it's 46%. For the over 65s it's 28%.
Growth exposure roughly halves at the moment the money needs to last another 20 years.
The number that counts is when you'll spend the money. If you're 65 and drawing an income over 25 years, the last dollar in your account has a 25-year horizon. Any assets that can't keep pace with inflation are a slow, certain loss over that sort of timeframe. A 35-year-old can wait out a bad decade, but someone drawing an income cannot, because selling units in a falling market locks the loss in. That's an argument for holding a couple of years of spending in defensive assets, but not for parking it all there for 20 years.
“Diversify” has become a polite way of saying “take less risk”. They aren't quite the same. Moving from a growth fund to a conservative one lowers the expected rate of return. Diversifying spreads the sources of that return, which for someone with 20 years still to fund is more important.
Look at how the large institutions do it. The New Zealand Superannuation Fund doesn't hand its global equities to a single manager. It runs several, alongside passive mandates, a set of bond managers with different specialities, and an in-house team. When one is flat, another is running, and the combined result is close to the same return with a smoother ride.
Almost everyone who has diversified did it by asset class; very few have done it by manager. And a growth allocation isn't automatically a diversified one. A large share of New Zealanders' growth exposure now sits in global index products where a handful of the same very large companies dominate the weighting. That's a perfectly respectable way to invest; it’s really paid off in the last couple of years and it's also a concentrated bet.
There’s an old rule about not backing the horse that just won, because it has probably peaked. Investors mostly ignore this maxim. Long-run returns (20 years plus) from global shares sit somewhere around eight to 10% a year, and some recent three-year numbers have run at more than double that. The impact of these recent returns has also materially inflated the 10-year numbers which would ordinarily be the go-to reference point for index returns, but they have also normalised elevated return expectations for recent investors. Underperformance isn't ideal, but outperformance has to be interrogated too, because it isn't the long-run average and shouldn't be planned around as though it were.
The same data holds a bothersome finding of which the investment industry should take note. Among KiwiSaver members over 65, men hold 27.9% and women 19.9% of their balances in growth funds. Women hold more in conservative funds, 26.8% against men's 20.9%. Women also live roughly two years longer than men and arrive at the milestone of 65 with less. Retirement Commission figures put the gap between men's and women's average KiwiSaver balances at an astonishing 36% for those aged 56 to 65.
The actuaries are careful to note this may reflect account size more than gender, since smaller balances tend to be invested more cautiously (but of course, women are more likely to have smaller balances because they take more time than men do out of the workforce to have children and fulfil other care responsibilities; time out means less opportunity for promotion and pay increases; and women are on the losing side of the gender pay disparity for the years they are in paid work). The group with the longest time horizon and the least money is the group taking the least investment risk.
So when is it too late? Later than most people assume, and it has almost nothing to do with turning 65. What has changed is the length of the retirement being funded, while the settings most of us chose years ago were built for a shorter one. Reviewing them at 55, 60 or 67 is not reckless. Leaving them alone is the risk. Anyone unsure where they sit should talk to a licensed financial adviser and set a strategy that doesn't revert to the default.
Disclaimer: This information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be relied on as financial advice. Before making any investment decision, you should seek professional advice suited to your personal circumstances. Past returns are no indication of future performance.