How to maximise your investment in KiwiSaver
With KiwiSaver as part of a wider investment strategy, it’s still important to think about how you can maximise the returns you’re getting from your KiwiSaver today, in the lead up to, and during retirement. Here’s some considerations for today, tomorrow and when you retire in the future.
Today: Are you invested in the right funds?
Most people are familiar with the broad fund categories of KiwiSaver Schemes - Conservative, Balanced and Growth - which target different levels of risk. However, what many people don’t understand is that you also have the opportunity (and ability) to manage your risk by carefully selecting the specific types of funds you invest in (note: you can choose your funds, but not the underlying assets the fund is invested in). For example, if 'new tech' and innovation is of interest to you, you could choose to split some of your KiwiSaver investment into the ARK Disruptive Innovation Fund* that invests (on your behalf) in companies that meet specific criteria for 'disruptive innovation'.
A fund’s risk level is defined in the product disclosure statement (PDS) and is based on historic volatility. Volatility is about how much the value of the underlying assets move up and down over time. For example, equities typically move up and down by greater amounts than bonds and so would have a higher level of volatility and higher risk rating. Cash is typically more predictable in the short run and will only have small changes in value especially in periods when interest rates are very low. By choosing a combination of these assets the KiwiSaver providers are able to target different levels of risk for different funds.
How do you decide what funds are right for you? Consider:
As a general guide, the more time you have until you can access your KiwiSaver for retirement, the more risk you may be able to tolerate, as you have time to recover from potential losses.
Other investments you may have
If KiwiSaver is your entire retirement saving plan, you might want to make sure it's well diversified across different strategies. But if it is a small portion of your total retirement plan, you may look at shifting towards a more aggressive fund. Consider how to achieve diversity with a mix of assets as you grow your wealth.
Your level of comfort with risk
Your level of comfort with risk is important, regardless of your timeframe and mix of investments. Are you comfortable with losses in the short-term to achieve higher returns in the long run or does the thought of any loss keep you up at night?
Consider active vs passively managed funds
Do you want rules-based investment (passive) or would you prefer an experienced professional to be researching companies and markets and making calculated investment decisions?
Tomorrow: Think about your contributions
An obvious option many people question is the value of increasing contributions to KiwiSaver compared to investing money elsewhere. As your investment is managed for you, under strict government regulations and with reasonable fees, you could consider increasing your contributions to beyond the minimum 3%.
However, remember that your money is locked into KiwiSaver until the age of 65 – unless you’re making a withdrawal for a first home or other limited circumstances. So before deciding to increase your contributions, do the maths to see if it suits your situation. You may want to consider an additional long term investment outside of KiwiSaver using managed funds.
When you retire: Your investments can continue
You can still keep your Kiwisaver invested – but consider how and when you want to use your KiwiSaver.
As you approach 65 and immediately after, you should continue to assess your objectives and comfort with risk, for many people this may change once you stop earning. If you intend to start using your KiwiSaver for income straight away you may choose a mix of lower-risk, income-focused funds. However if you don’t intend to use your KiwiSaver for another 5-10yrs , higher risk/return funds maybe more appropriate to help reach you retirement goals. Or you could be somewhere in the middle in which case a combination may be best.
With the right structure of funds within your KiwiSaver, after 65 you’ll have the flexibility to draw down your money, as and when you need it, but also keep your investments working.
* The ARK Disruptive Innovation Fund is available for everyday Kiwi's to invest in via GoalsGetter.