Agony Aunt: Investing $500,000 cash in KiwiSaver at age 60 is not a good idea

Dear Janine,

Recently you warned people in their early 50s about placing all their investments into KiwiSaver.

I'm in my early 60s, own a house and have about $500,000 in term deposits and $100,000 in shares. The best I can earn on the term deposits is just over 5 per cent for five years.

I have started to think I should invest a significant amount into KiwiSaver. Why? Because my growth fund has earned 21 per cent over the past year. Even in the last three years it has been 16 per cent a year.

It's a considerable amount of money and there's the risk of losses in another crash. At the point where this happens I would switch to a 'conservative' account and at least maintain the gains.

The flaw is the crash might be so sudden that I lose the investments too fast, before my fund managers switch the direction of the fund for me. What do you think of this approach? 

ANSWER:

Frankly I think it's awful. Although I can see your reasoning and you've constructed this approach on perfectly rational grounds. When you've just experienced a 21 per cent return in a year with your feet up, anyone would want more of the same. 

The financial markets never allow us to lean back on the sun lounger and have our toes tickled, year after year.

Occasionally we find ourselves dripping wet, trying to prevent the brolly from blowing out to sea. Those are the big crashes you talk about and would like to predict.

But mostly, the clouds and showers come and go. Just as we panic and run inside, everything warms back up again.

You'll drive yourself mad trying to predict if each downturn is a new bear market.

The fair-weather returns we've had for some years now, are not typical. They are simply a single phase of long-term investing.   

KiwiSaver funds have had a tail wind. They were born in 2007 just prior to the global crisis.

Surprisingly few people realised they were losing money thanks to some fortunate smoke and mirrors; low account balances, the government kick-start and employer contributions.

They all masked returns.

By 2010 the three-year performance numbers sat around minus 1 to plus 1 per cent for growth funds (well below term deposits).

Vast numbers of savers were also shielded by the conservatism of default funds. 

The reality for the New Zealand sharemarket was a recovery period that took more than 5 years.

In May 2007 the index of the top 50 companies sat at 4302 points.

This number was not seen again until February 2013. Anyone remember 2500 in January 2009? 

Investors learned nothing about risk, but this was a large relief. No one in the financial industry wanted to see people burnt, just when New Zealand had got its act together and launched a fantastic long-term savings scheme.

Earning 21 per cent, or 16 per cent a year over three years, is the result of a structural readjustment after a large sell-off.

We've all had a party by bouncing off the bottom off 2009. But it's not normal and shouldn't be viewed as normal. 

Growth funds are a wonderful choice for those in the asset-building phase of their life who can afford to take risk. In other words, if the market implodes they have time on their side to recover.

In your early 60's it's time to start dressing in more age-appropriate fashion. Growth funds don't have to be banished, but they need a wide range of companions to tone them down. 

My major bone of contention with sticking large lump sums (such as your half-million) into KiwiSaver is two-fold.

First, manager concentration and second, the lock-down period until you are 65. 

Unless you are investing largely in index funds, then it is not wise to concentrate all your risk on the views of one manager.

The lock-down isn't such a big issue given your proximity to 65.

Growth funds require a five to 10 year view and I suspect your retirement needs to start in this time.

You require a proper plan with a wide spread of risk among funds and a draw-down facility for retirement income where interest, dividends, capital gains and raw capital is stripped out to create the lifestyle you need.

In short, you need a financial adviser, not a KiwiSaver manager. 

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.