Safe saving

Historically low interest rates, booming stock markets, a property market that defies all logic – all of these developments present challenges for investors and pose serious questions for anyone planning to save for their retirement in the traditional way.

That traditional way was by putting money aside regularly into some sort of superannuation fund. Since 2007, for many of us, that has meant one of the many KiwiSaver funds on offer.

On a very basic level it is still a simple decision to join KiwiSaver; where else, for $1,042.86 invested a year would you get an immediate 50% bonus of $521.43?

That is a significant, largely risk-free, guaranteed return on investment every year. It even makes sense for anyone saving for their first home, because they can still access their savings and the subsidy for that specific purpose – as well as in cases of significant financial hardship.

But what if you want or need to save more than that minimum amount each month? Should that also go into KiwiSaver or should it be used to chase higher returns elsewhere?

To answer that question, the first consideration is your appetite for risk.

KiwiSaver is designed to accommodate different risk appetites, with funds ranging from low risk, low return options to higher risk ones with potentially (and historically) higher returns.

As a rule of thumb, your appetite for risk should diminish with age as your retirement nest egg grows and your retirement target date approaches.

The reason for this is simple; someone at 30 years of age has a lot more time to recover from their investment mistakes than someone aged 60. If you are abiding by that rule, KiwiSaver investors should consider moving their retirement savings progressively from high growth funds to more conservative ones over time.

Because KiwiSaver is not compulsory, however, New Zealand investors can opt to divvy up their capital into an array of different investments, each with their own risks and potential returns.

They can be in KiwiSaver, with all its benefits (not least being higher levels of regulatory oversight), as well as in other types of funds. You can also choose to invest directly in shares, property or a business of your own.

People investing outside of KiwiSaver should also consider reducing exposure to risk over time, playing safe with at least a core portion of their capital to create a financial safety net.

The fact is governments, including our own, have been ‘printing’ money for over a decade in a process called quantitative easing to stimulate economic activity. There is a lot of money out there looking for a profitable home because interest rates are at historic lows. That flow of investment has driven up the value of all sorts of assets.

For first home buyers, surging property prices are disheartening. It is hard to keep up, let alone get ahead. The temptation to take increased risks is high. But investors should take note that it isn’t just property and stocks at historic highs, but gold as well. Traditionally, gold prices surge when people search for safety in volatile times.

That could be a warning to be wary.

It is just a decade since many nearing or already in retirement lost their life savings when the finance company sector collapsed, often for the sake of chasing just one or two per cent more in interest. Before that, back in 1987, it was the lightly regulated share market that did the damage.

For most, KiwiSaver provides a solid base for savings in reasonably transparent regulated funds. That is a combination that can help investors match risk and reward far more accurately than elsewhere.