By Amanda Morrall
I have been accused in the past of being somewhat naive, most often by my mother and you know mothers have an annoying habit of being right.
On this occasion, my alleged naivety (I'm not totally convinced I've been duped) has to do with believing modern investment theory that the younger you are the greater risk you can afford to take.
With this in mind I enrolled both my children in growth funds within KiwiSaver. At the time they were 6 and 7. I figured (and part of me still believes this) that they'll be able to tolerate a fair bit of market volatility over the time it takes them to grow old, get grey hair and retire at age 65. Being one of those naive minded do-gooders, I also dumped them into what I was led to believe were socially responsible investment funds. (See How to be good in KiwiSaver to learn how to spot the difference).
I'm not so sure I've done right by them on both accounts but I really have no one to blame but myself. For one, I didn't take any professional advice when I enrolled the kids, I self-selected thinking I knew best. And secondly, I haven't contributed a cent to their accounts since collecting the $1,000 kick-start.
At the time, I reckoned the returns from the higher risk I was signing the boys up for would not only cover the fees they paid to have their investments managed but also earn them money.
Gone by 30?
It is still early days, and I have to remind myself that we're coming out of one of the rockiest investment periods ever (which could yet take another turn for the worse) but at the rate we're going, I'll have lost the boys' money before they turn 30.
If I'm incompetent in this regard at least I am in good company.
According to the latest annual KiwiSaver report produced by the Financial Markets Authority, there are close to 300,000 juniors in KiwiSaver under the age of 17. Of this not insignificant number of junior investors it is believed that 90% are non-contributing. That is, like me, they've collected the $1K and haven't chipped in a cent.
For a time, it looked to be working out okay for my young ones. They were up about $200 for a time. This year however things have taken a turn for the worse. Just how bad I couldn't tell you because the provider hasn't published the fund's performance since March 11, a curiosity in and of itself that I've reported to the FMA.
Given the high fees associated with this fund, and it's shoddy performance of late, their earnings have been whittled away to $40.
$20 a week could go a long way
Now had I budgeted for their KiwiSaver and put into their account $20 a week so they could get another $521 a year in "free" (re. taxpayer) money, (please note under 18s are not eligible for member tax credits) they'd be in a much better position. Obviously long-term returns are totally unpredictable however I had a play with our latest contributions calculator and determined the following:
With the $39 annual fee on the account, plus the 1.5% above average investment fee, a PIR (prescribed investment rate) of tax at 10.5% (we rounded up to 11%) and no contributions beyond the $1k kick-start, in five years, they'll be down to $780 $680 and in 15 years $460 $190. That's based on an assumed rate of return of 2% so maybe a tad pessimistic but close to what the fund had delivered per annum over the past three years according to our data.
Scenario two is much cheerier one. Presuming I could cough up $20 a week for each child so they could benefit from a further $521 a year (and assuming that sweetener doesn't disappear) in five year's their respective accounts will have grown to more than $10,000 (assuming a 2% rate of return) and in 15, just over $23,500.
I don't like thinking about the future much, particularly as my boys will have flown the coop by then and I'll be left with an aged and ailing dog and cat (if I'm lucky) however I'm guessing they won't be entirely displeased to have $24,000 for a potential deposit on a home or as a university graduation present.
I appreciate there are numerous variables that could change the equation: A 2% rate of return over 15 years might turn out to be optimistic. I tend to think it's modest enough to be realistic. The Government could revoke the $521 a year Member Tax Credit. Another scenario which I believe to be realistic given our economic circumstances. The boys (charming and handsome) might marry rich and have no need for a deposit on a house or home ownership might be something neither of them aspire to.
Lots and lots of non-contributors
There are plenty of other unknowns for me and thousands of other parents to think through but it's not just kids' KiwiSaver accounts that are languishing.
The FMA, in its 2011 report, estimates that 45% of all KiwiSavers (that's including the under 17s) aren't contributing or haven't contributed to their accounts in two months or longer, a trend that appears to be growing each year.
In 2010, the FMA notes that the "contribution index" measured 60 percent (around 816,031 contributing members). The year before that it was 77 percent (755,185 contributing members).
"Hence, there has been a further increase during the year in those not contributing. It is not possible to identify the degree of members’ contributions and the level of those contributions from the data."
In the FMA's view, parents, grandparents and "even other family members need to be encouraged to make regular contributions in the same way that the post office savings introduced children to the savings concept in the last century."
Far be it for me to tell the 774,000 odd KiwiSavers who aren't contributing what to do. If I've convinced you to at least read your annual statement, I'll have done my duty.
26 Comments
For those paranoid that they will be 'locked in" to Kiwisaver - well, after 1 year you can have a holiday for up to 5 years, as many times as you like. So you can be in for 1 year, then take a break for a year, then back in for 2 years, then holiday for 3 years etc ..... Probably not a good idea but then if you read lots of depressing news and blog comments you might keep every $ liquid for a season.
90% non-contributing (under 17) of 300,000 members x $1,000 kick start? Lucky fund managers. Money for jam.
The old school Post Office savings accounts for kids was a bit more real maybe for showing the value of savings? Is there still such a thing?
p.s. I'm not against saving at all. In fact, I'm not so much against kiwisaver as a tool that will suit some people. I am just dead set against it being foisted upon all as the be all and end all of saving for your own future.
I can't help but wonder Amanda if your boys can opt out of Kiwisaver since they didn't make an informed choice to join:)
I guess you also had to get them an IRD number? I don't know if that is required for being in Kiwisaver as I have not joined.
I think if Ian Wisharts research in that it is not mandatory to have an IRD number in New Zealand, however if you do get one then you have to pay income tax.
Thanks Scarfie. Yes, I'm a terrible mother apparently as well as a crap journalist.:) I don't pretend to be anything other than human and someone who is engaged in lifelong learning.
I still tend to think that even without $521 extra year, in a decent performing fund, with low fees, the kids will be okay. But maybe my mother will be proven correct once again.
Amanda , I have written previuosly about this Kiwisaver rort , so please read this .
There is a solution .
When I realised that my 3 children's Kiwisavers would be eaten in fees, I found out that Westpac Bank has a zero fee Kiiwsaver for Minors ( Kids under 18 if I remember correctly )
They pay interest on the balance and its actually grown unlike mine which has lost about 1/3 rd of its value ( Capital loss)
Please respond if you see this comment , because the Westpac Bank plan is the only solution to this problem.
What we really need is for legislation that forbids Kiwisaver Providers from eroding Capital , in other words they can only take their fees from income.
Its time for Kiwi's to stop being so bloddy lazy and stand up to this kind of rort
Boatman,
Thank you for pointing that out. Actually I was thinking about shifting them that way as they have jr. accounts at Westpac and one of the redeeming aspects of that bank is they marry the KiwiSaver accounts to the savings accounts so you can keep a closer eye on them if you bank electronically. People are lazy sure, but it's an added obstacle when you have to go hunting for information while you wait for annual statement to arrive in the mail.
Sorry to hear you've lost 1/3 of your capital. Ouch.
Boatman, KiwiSaver providers (and other fund managers) incur expenses managing investment funds even if they don't make a return; just as electricity companies incur expenses maintaining their infrastructure, no matter how much electricity you use, and paying staff to man the telephones even if you never telephone them.
There are fixed costs, in short. Westpac must be meeting this cost from somewhere, meaning that somebody else is paying for your children to have no-fee accounts. Requiring all KiwiSaver funds to be fee'd in this way would mean a far larger amount of fixed costs that had to be met by other means, and probably damage the viability of smaller KiwiSaver providers who don't have the same scope for cross-subsidisation that a large bank has.
Amanda, as BC says what you have done isn't nothing by any means; but your children will learn so much more about the value of saving if they see how even low-level regular contributions + returns build up over time.
Why can't they be like every other business and pay for expenses from income? If you are not making the income then cut back your expenses. If you don't make enough income then you stop trading.
The electricity company and the telephone company invest their own capital in expectation of a profit, not yours.
Perhaps a fairer analogy would be a commission only salesperson.
@Boatman....Thanks for the info on the Westpac Kiwisaver. I called up Westpac and got it confirmed that they do waive off the admin fees* ( management / trustee fee, expenses have to be paid) if the child(under 18) has a saving acct with them.
*Provided you make atleast 1 deposit (any amount) in a year into the child's saving acct.
I think that is fair enough. Atleast with the Westpac acct one is assured that the admin fees wont erode the children's Kiwisaver as fast as the others.
@Amanda.... thanks for triggering this discussion on kids kiwisaver.
I think you are being too hard on yourself. You have provided a starting point and once they get to 18, it's all in their hands.
Once children reach 18, they are able to make the most of the member tax credits available and furthermore, if they start working, they will also have their minimum contributions doubled by their employer. This is under the current rules which, as we know, may change.
If they don't want to contribute as they work, you have given them the abillty not to make contributions from the get-go rather than going through a process with their employer.
By the time they reach a first home buying age (let's be optimistic and say age 25), then they should have money available to help buy a first home. They can't use the initial $1,000 or the member tax credits for that - but the other contributions are OK for that purpose.
I would not dream of giving advice over the fund choices because that is a matter for you alone.
However, generally speaking, the dilemma of wanting low fees and the peace of mind that the investments are socially responsible can be tricky. While KS fund choices that avoid investing in companies i.e. "cash" funds - will probably deliver lower returns over the long term, at least it won't be a roller-coaster ride of volatility - and the fees are low. This may suit someone looking to access KS money while they are young. Yes, other funds may give better returns - but the KS money paid in has been doubled already by the employer, so it's not so bad in that context.
Hi Amanda
I agree with Black Celebration. I have the same attitude. My three kids (5 and under) have been in KS from 6 weeks of age. Each gets $20 a week. They are in a growth fund and over two years the return has been a touch over 10% after tax. The oldest has over $6000. When they start a part time job they can add more and by the time there in the 20s they will have a great deposit for a house. The best thing is that if they tell their dad to get stuffed they can't touch it to spend on something stupid like a drop dead boyfriend and it's still there for their retirement :)
I just can't believe that, it's so ridiculous. The only way to grow the account is to put money into it. This is a taxpayer funded scam. The government gives my money to fund managers via kiwisaver. It's hard to justify paying someone that is constantly losing you money, no matter how nice a person you are.
Your spreadsheet is buggy, which is a bit unfortunate given that most of your article depends on it. (You are taking the earnings to be the lesser of 2% or $0, which is unsurprisingly $0 all the time)
The 5/15 year calculation doesn't look right either (you're assuming a fixed absolute return per year, but your absolute return actually varies depending on the account balance)
(Edit: 10 mins tweaking the spreadsheet [YMMV], and I get:
no contributions, 10.5% PIR, 2% return - $964/$781/$410 after 1/5/15 years;
$20/week, 10.5% PIR, 2% return, no tax credits - $2013/$7123/$17568;
or you need a return of about 6.0% to offset the fees and tax on a $1000 balance)
Kiwisaver - average.
Dollar cost averaging into one of the low fee ETFs is the way foward. It would be nice if VAS and STW in the ASX 200 could be added as options (0.3% vs 0.7% fee for "smartshares" which kiwisavers can use).
and vs the 5.4% Amanda is paying to "beat the market". Apparently.
'
Joke of the day, cheer up.
Snigger
Last year, my friend upgraded his GirlFriend 3.1 to GirlFriendPlus 1.0 (marketing name: Fiancee 1.0). Recently he upgraded Fiancee 1.0 to Wife 1.0 and it's a memory hogger, has taken all his space; and Wife 1.0 must be running before he can do anything. Although he didn't ask for them, Wife 1.0 came with Plug-Ins such as MotherInLaw ,BrotherInLaw and Shopping list 1.1 .Applications such as Boozing 2.5 and Saturday Night Pubs 5.0 no longer run, crashing the system whenever selected. I cannot keep Wife 1.0 in the background while attempting to run some of my other favorite applications like Night Club 4.3, Dance 'n' Drink 2.0 and Blokes night out 7.77.
Some features I'd like to see in the upcoming GirlFriend 4.0...
A "Don't remind me again" button
Minimize button
Shutdown feature
An install shield feature so that Girlfriend 4.0 can be completely uninstalled if so desired (so you don't lose cache and other objects)
I tried running Girlfriend 2.0 with Girlfriend 1.0 still installed, they tried using the same I/O port and conflicted. Then I tried to uninstall Girlfriend 1.0 but it didn't have an uninstall program. I tried to unstall it by hand, but it put files in my system directory. Another thing that sucks -- in all versions of Girlfriend that I've used is that it is totally "object orientated" and only supports hardware with gold plated contacts.***** BUG WARNING ********Wife 1.0 has an undocumented bug. If you try to install Mistress 1.1 before uninstalling Wife 1.0, Wife 1.0 will delete Money files before doing the uninstall itself. Then Mistress 1.1 will refuse to install, claiming insufficient resources.
Here was the reply from Tech Support:
Re: Failed Upgrade
This is a very common problem among men, but it is due mostly to a primary misconception. Many people upgrade from Girlfriend 7.0 to Wife 1.0 with the idea that Wife 1.0 is merely a UTILITIES & ENTERTAINMENT program. Wife 1.0 is actually an OPERATING SYSTEM and designed by its creator to run everything.
It is unlikely you would be able to purge Wife 1.0 and still convert back to Girlfriend 7.0. It is impossible to uninstall, delete, or purge Wife 1.0 from the system once installed. You cannot go back to Girlfriend 7.0 because Wife 1.0 is not designed to do this. Some have tried to install Girlfriend 8.0 or Wife 2.0 but end up with more problems than the original system. Look in your manual under "Warnings-Alimony/Child Support;" this was given to you at time of registration with Wife 1.0. I recommend you keep Wife 1.0 and just deal with the situation. Having Wife 1.0 installed myself, I might also suggest you read the entire section regarding General Partnership Faults (GPFs).
The best course of action will be to enter the command C:APOLOGIZE. In fact I would suggest you use this command every time Wife 1.0 crashes on your system. Wife 1.0 is a great program, but very high maintenance.
Consider buying additional software to improve the performance of Wife 1.0. I recommend Flowers 2.1 and Chocolates 5.0 or Movies 4.5.
Do not, under any circumstances, install Visual Secretary With Short Skirt 3.3. This is not a supported application for Wife 1.0 and is likely to cause irreversible damage to the operating system.
Recent surveys show add-ons like Visual Dress 2.0, Diamond Necklace 3.0, and A Quick trip to Paris 1.0 are the best Third Party tools supported by Wife 1.0 to allow it to run smoothly and effectively.
Sure, KiwiSaver gives you an initial free gift of $1,000. But that 1K looks awfully like a subsidy to providers, with it's inevitable (and largely unjustifiable) fat fees and service charges. Add in the dismal prospect of good returns and lack of compensatory tax relief and it looks like a really poor option.
Do you have a mortgage and a spreadsheet? At a 5.89% guaranteed return (which is historically low), simply putting money for the kids in my revolving credit account seems way, way better than plumping for KiwiSaver. The spreadsheet calculates how much of the equity in the loan I owe to the children (current$+% on current$)+regular payment)), and keeps me honest whenever a tempting new toy strays into sight.
The Westpack junior savers scheme seems like a good idea, and yet my Westpac bank manager does the same thing as me.
The First Choice KiwiSaver Scheme has a 30 September balance date.
Under the KiwiSaver Act the provider only has to provide a Trustee Annual Report to members annually within six months of the balance date (with a copy to FMA).
The 30 September 2010annual trustee report included a table of rates of return before tax and after fees (excluding administration fees).
I note the latest unit prices for these funds is provided at http://www.firstchoiceinvestments.co.nz/fund-performance/unit_prices.asp
While the law does not require providers to publish fund performance on a quarterly basis, they may wish to do so.
The Ministry of Economic Development is working on the KiwiSaver periodic disclosure regulations, which propose both quarterly and annual reporting of fees and performance for KiwiSaver Schemes.
Gavin Quigan
Manager, Superannuation Schemes, FMA
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