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At 65 years of age, should I go or should I stay?

Q.        I enjoy reading your articles in the Hawkes Bay Today and wonder if you can make a suggestion for my situation?  In 6 weeks I will be 65 and I am wondering what my options are with my KiwiSaver account which has just under $10,000.  I joined up too late really but never mind. I am now self-employed and have continued contributing to gain the full Government top-up.  I am aware that once I turn 65 I won't get this but my question is, do I leave it there or will I get a better return from a term deposit at the bank?

A.            This is a good question, but a more appropriate question is “Am I in the right fund?” There are over 200 different KiwiSaver funds to choose from. At the lowest level of risk you will find cash funds, followed by conservative, balanced, growth and finally aggressive funds. 

Default funds (for those who sign up through their workplace without choosing a fund manager themselves) are all conservative, so most people are invested at that level (whether it’s suitable for them or not). As you are over 60 it would be entirely appropriate for you to be in a conservative fund, unless you plan to leave your KiwiSaver account alone for the next 10 years in which case a balanced fund would be fine too (if you can tolerate the greater ups and downs).  

Anyway, let’s say you are in one of the largest funds, the ASB Conservative Fund. This fund holds about 10% of all KiwiSaver money or $2 billion. It is a passive fund which means that it invests into various indices rather than relying on the expertise of the fund manager to decide where to invest. Some investors like this style of investing (and fees are usually lower), while others prefer an active manager. 

To find out how this fund has performed, go to Sorted’s Fundfinder tool. There you will see that this fund has averaged 4.88% per annum after fees and tax over the past 5 years (compared with the average of 5.66% per annum for similar funds – so somewhat underachieving).   ASB Bank is currently offering 4.35% before tax for a 12 month term deposit so 4.88% per annum after tax sounds better. However, if you look at the actual returns you will see that they have varied from +8.5% to -1.04%. So a steady return year on year is by no means assured, because the fund invests in shares and bonds as well as cash, and this is typical of most KiwiSaver funds. 

Talk to your fund manager or an authorised financial adviser about what suits you best. KiwiSaver is not like a term deposit, unless it is 100% cash. There are many situations where a term deposit is suitable, and equally as many where a KiwiSaver fund is the better choice. Questions such as, “When will you need this money?”, “What is your financial situation?” and “Do you feel comfortable taking risk?” all need to be asked.

You may be eligible for NZ Super when you turn 65 which could give you an extra $350 per week depending on your situation. As you are still working, you may be able to increase your level of saving? At age 65, your life expectancy is 88 years so you could have 23 years ahead of you. The sensible option would be to save as much as possible while you are still working, and then draw down a regular income from your KiwiSaver account so that the bulk of the money keeps working for you for as long as possible. 

KiwiSaver is a very useful vehicle for retirement saving even without the Member Tax Credits, as it is highly regulated, requires clear reporting and allows you to diversify your savings.  Those investors who cash up and close their accounts at age 65 are unable to re-join. They may find that other investment options are more expensive and less accessible than a KiwiSaver account.

Hawkes Bay Today
8 July 2014
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz