Why you're probably investing too much in KiwiSaver

What’s the biggest risk facing KiwiSaver investors right now? The answer is not fees (despite all the hoopla over five managers losing their default schemes).

The risk is this; you are probably investing too much. That’s a big statement from someone who believes in the merits of the scheme and has been vocal about saving furiously for retirement.

When asked if I invest in KiwiSaver myself, I shift from one foot to the other. Like me, most clients of financial advisers would have the same response.

Declaring my own position, of course I have a KiwiSaver fund. It’s with a company called Booster and there’s a fortnightly payment of $40. With a grand total of $1040 a year, I’m currently drinking more flat whites than I’m investing in the national savings scheme.

Incase you hadn’t clocked it, that’s just enough to get the free money ($521 per year) from the government. For those with a job it’s also wise to put in 3 per cent of your wages to get the matching contribution from your employer.

Covid lockdown, KiwiSaver lock-up

While we were all in lockdown, it became clear that it’s easier to escape Paremoremo than bust open your retirement savings.

For those who suffered financially during Covid-19, accessing KiwiSaver involved multi-page forms proving financial distress. You need to declare all your assets and liabilities, income and expenses and an explanation of your circumstances. And still people are declined access if other options appear to be available.

There are very good reasons for this, because touching retirement money should be the last port of call.

It’s ironic that clients of financial advisers or DIY investors hold a vast range of similar funds outside KiwiSaver (run by the same managers) and have access within a few days. No explanations required.

Every fund is highly liquid and so are all KiwiSaver funds underneath the packaging. It’s only a government rule that you can’t touch it until age 65, not a physical constraint of the fund itself. Even early retirement is removed as a choice under government rules. You need to be nearly dead to pull that one off.

Liquidity trap

The government quite clearly isn’t a financial adviser and isn’t pretending to be one either. If it was, there would be a strong case for having it struck off.

Government has simply provided the rules behind how we must invest in order to qualify for a bonus payment of $521 a year and the employer contribution. Yet as pointed out, once you’ve got your employer’s 3 per cent and the government’s $521, you’re signing up to a state-controlled money jail.

What Covid taught us is that emergencies happen. They might affect everyone, or they might be limited to just your family or the company you work for. It won’t always be a global pandemic.

Most of us don’t have access to three to six months’ wages (the recommendation for an emergency fund) and it’s not a great idea to have that much cash on deposit, at close to zero return. When markets are highly liquid and money can be returned within days, investing a good proportion of your emergency fund is a better idea. That can be achieved by building up various funds outside KiwiSaver.

While the government has just announced it’s looking at an insurance-based unemployment scheme for use in a major crisis, don’t hold your breath on that one. Given the world’s reinsurers now have real life data on the scale of this type of liability, their pricing of the premium will be painful, especially with no stand-down period (usually one to six months).

Regardless, it would be unwise to put any weight on such talk. Get saving and keep it liquid.

One manager trap

As an investor, it’s very easy to get confused about the merits of a state retirement scheme. You’d at least assume there was some theory behind the rules and the structure. But there isn’t in our case.

Internationally, our scheme gets eyeballs popping. When I tell old colleagues how KiwiSaver works, chins hit the floor.

The most common comment is “how did your government get away with it?” and “seriously, they make people put all their money with one manager for 40 years?”

“Oh, you can switch managers,” I explain, but the whole balance has to move. At this point someone usually spits out their coffee in disbelief and asks if they can set up a funds management business in New Zealand given it’s gloriously anti-competitive.

Invest outside KiwiSaver and a whole world of managers opens up. Like a kid in a lolly shop, you get access to all the flavours. It’s called diversification, and it’s the gateway to both control of your own emergencies and the option of early retirement.

Janine Starks is the author of www.moneytips.nz and can be contacted at moneytips.nz@gmail.com. She is a financial commentator with expertise in banking, personal finance and funds management. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.