By Amanda Morrall
A few weeks ago ANZ Wealth floated an idea to modify the way defund funds in KiwiSaver are structured to automatically adjust asset allocation according to the investor's age.
The rationale was that young KiwiSavers who found themselves in a default fund, and whom couldn't be bothered to change out of this conservatively structured fund, could potentially cheat themselves out of NZ$72,000 over 40 years of investing. That's based on the assumption, supported by historical investment data going back 100 years, that over longer time frames equities markets will out perform other asset classes, namely cash and fixed interest.
ANZ Wealth estimated that there are roughly 191,000 investors who could inadvertently lose out on these gains, leading the default provider to label the situation a NZ$14 billion timebomb. (Find your fund here).
Simon Botherway, general manager of investment, said despite recent KiwiSaver performance data showing conservative funds outperforming growth funds on average, investors with 40 years to go could be disadvantaged. (See Amanda Morrall article here for more).
"What we're saying is that the asset allocation implicit in the default fund is so conservative that the returns they will generate over the full period are substantially less than they could be if they were invested in a more suitable asset allocation profile which would include a significantly higher percentage of growth assets, particularly in the early years of investing.''
The $72,000 figure that ANZ Wealth bandied was based on a worker earning a base salary of NZ$36,000 and contributing 2% of their salary as well as receiving 2% contributions from their employer. It also accounted for the $1,000 kick-start and wage growth of 2.5% per year with a final salary of $104,000. Total contributions to KiwiSaver would be approximately $140,000.
Based on average returns delivered by a conservative fund, the compounding effect over 40 years, would see that balance grow to $248,000. By comparison, a KiwiSaver invested in a "life stages" type of fund (that has a higher allocation of "growth" assets such as shares at a younger age) would end up with $320,000.
Past performance is no indication of future returns
Given the global financial crisis (which has had the effect of giving funds more heavily weighted in fixed-income investments superior returns) and on-going economic instability world-wide, one might question the tenets of modern investment theory and some of the assertions made by fund managers about conservative funds being long-term losers for young investors.
Investors are constantly reminded and cautioned that past peformance is no indication of future returns. The exception to that rule would appear to be time, according to fund managers.
Botherway concedes there are no guarantees in investing but argues the past few years have been exceptional in history and should not over right 100 years of historical market data.
"There isn't any absolute certainty (about growth funds) but there isn't any absolute certainty in income assets either. If you are invested in Greek bonds, there isn't the certainty you felt there was when people invested in them,'' he said, in an interview with interest.co.nz
"If you look back at history, taking 110 years worth of data, since 1900 to 2010, what it shows in 19 major developed nations, is equities outperformed bonds by an average of 3.8% per annum. The cumulative effect of that out-performance over that extended period of time makes a big difference to the final outcome. That's the nature of compounding returns.
"The last decade has been the exception where bonds have substantially out-performed equities but when we look at equities now we perceive them to be relatively cheap. There are no guarantees but once we get to flat economic waters equities markets will be substantially higher, there is no doubt about it.''
Playing it conservative for the sake of a home
For younger investors looking to use KiwiSaver funds as a deposit on a first-time home, going for growth is a high risk proposition. That's because with few exception, most growth funds under-performed conservative funds over shorter periods of time. For someone with a three-year time horizon in KiwiSaver (which is how long you have to be active in the scheme before being eligible to draw down on your money) conservative-oriented funds are a safer bet, adds Botherway.
"What we're saying is that for those who make no active choice in KiwiSaver and who are intended to save for retirement via their KiwiSaver this is the right option (a lifestages funds) but for those saving for their first time home that's different and they need to get some advice. Ideally, everybody would get advice but that's something that they should get specific advice on.''
And what about investors in their 30s or early 40s?
While life stages funds automatically reduce the weighting of shares in one's portfolio as you age, Botherway said even 30-year-old investors had time on their side.
"If you still have 30 years of time to save for your retirement, it will still be our view that a conservative fund is not appropriate.''
Don't count on NZ Super
Counting on NZ Super as a supplement or even a primary source of retirement income is not something most financial advisors recommend. In fact, they exclude it from retirement modelling projections altogether and suggest you treat it as bonus money.
Botherway said New Zealand was no different from many nations worldwide struggling with ageing populations living longer than ever on top of a relatively diminished pool of workers to finance the system.
"The affordability issues of NZ Super are front and centre and a number of nations have either raised the age of retirement or changed the nature of entitlements at retirement. New Zealand is not exempt from that. We have the same problem with an increasing number of retirees and few workers per retiree.''
Botherway said it raised inevitable questions about the NZ Super's long-term viability and security.
"Will it be there and on what basis will it be indexed and will it be means tested?''
Take charge
The uncertainty of the social security reinforced the importance of KiwiSaver, he said.
"What we're saying is that the KiwiSaver scheme is the one that is your own. The Cullen Fund (for the NZ Super) could be wound up any time by this government or a successive one. We're proposing that people take destiny in their own hands.''
ANZ Wealth has found support for its proposal from the funds management industry and Government but nothing concrete at policy level so far.
"We're engaging with stakeholders (this week),'' said Botherway.
"We consider this to be an important issue. At worse, it may encourage people to think about whether they are in the appropriate scheme.''
Support for a similar move across the Tasman seems to be gathering strength as well with policy makers taking a more paternalistic approach toward investors who either can't be bothered or don't know how to take care of their retirement savings.
"There is also a real focus on financial literacy in recognition of those people with low level literacy and a view that those who are not availing themselves of information should not be disadvantaged.''
Implications for SOE sell offs
Botherway said the upcoming privatisation of New Zealand's sovereign owned entities (SOEs) was all the more reason for investors to take a more active interest in the nature of the fund they are invested in through KiwiSaver.
Again, conservative investors could have the most to lose here, he argued.
"If you are in a default conservative fund, 80% of your funds will be invested in cash or fixed interest. So only 20% of your money will be invested in growth assets such as shares and of that a maximum of 40% would be invested in New Zealand shares.
"If you think about the SOEs that are subject to a mixed ownership model (with Government maintaining majority ownership), if you think about how much of the NZ share market they will make up eventually.We're sort of thinking it will be between 12 and 15%.
"Even at 15%; 15% of 8% means you have about 1% of your money invested in those SOEs which have great long-term inflation protected cash flows. And depending on pricing probably attractively priced. If you are a 25-year-old and only 1% of your money is going to be invested in those SOEs, I think you'll probably feel at 65 that you might have been short changed in term of your investment profile."
37 Comments
Doubt whether there will be any financial or equity assets available in their current form in 40 years time. Better for a 25 year old to buy a modest house and pay it off completely - then worry about equities, KS , & other dubious forms of squirrelling.
A freehold home cannot be stolen from you or debased in quite the same way that your Brierley shares are now worthless.
Agreed MB. Paying down your mortgage, or any other debt for that matter, is the smartest investment for most people.
Added to that is your point, that predicting whether financial assets, as we know them, will even exist in 40 years is by no means a certainty.
The whole global financial system may look very different by then. Banks and financial institutions, as we know them, may no longer exist :-)
Who knows?
" in 40 years time" Yep....2050.....no replacement for oil....AGW effects noticable...shares in most companies seen today will be far less value than today if they are even around...
"freehold home" of course its value can be.....houses are 50% over-valued....is a 25 year old takes a 90% mortgage on a $300k house abnd its worth $150k inside a decade he/she is screwed...
Better for the 25 year old to rent until this mess is sorted...it isnt over and its going to be very bad.....Once it starts and its 6 to 24montsh away, it will take about 5~6 years to drop to the bottom of a 2nd Great Depression and then property will be a reasonable price.....Then the 30 something should buy....Right now asset and income protection from severe losses should be the prioity.
Today that 25 year old should have no debt ie student loan or be paying that off ASAPP....it wont remain interest free for much longer IMHO.....but when that happens I expect our brightest will be on the next plane out never to return.
regards
What a load of self serving twaddle in the article. Follow the money (fees) and its clear to see that this "advisor" has a vested interest is pushing shares and securites that allow for bigger charges ..
The "life-stages" concept ignores that fact that the markets do not perform in a linear manner and that there can be decades of minimal growth and flat-lining of markets - BEFORE the excessive fees and charges are taken into consideration.
This fact combined with individual circumstances and timings (when a person enters the market and retires) means that this "average" is rarely reached for the investor - and the only real certainty is that the institution will hoover up a higher fees payment irrespective of the poor performance.
I'm not interested in a 110 year statistic, I would be interested in a series of statistics that show performance in decade bands over 40 years - eg. investing from 1900 to 1940, then 1910 to 1950 ... but we will never see that quoted because some of the time equities would return a negative overall yield after fees ... FAR FROM A SAFE INVESTMENT.
As a self-employed person I have a minimal kiwisaver account (to hoover up the tax credits being offered) and I am not surprised to see that NZ Fixed interest has been the best performer of the last 12 months (+13%) ...
Nailed it!
The Ponzi markets only make money when there are more buyers then sellers. So for aggressive/growth ponzi's to make money, you need to funnel money into them. For SOE ponzi's to make money, you need to keep more people entering, then are exiting. Ponzinomics 101, they are trying their best to keep the ponzi going.
It would be interesting to see some long term research showing how these sorts of funds perform, compared with vanilla interest bearing deposits over 20 to 30 years. My impression is that the avereage Kiwi's experience with the Investment industry has been very poor so it is little wonder savers opt for the conservative funds (particularly in these volatile times)
"...an idea to modify the way defund funds in KiwiSaver are structured to automatically adjust asset allocation according to the investor's age".....did he mention the 'automatic' fee charge that would apply with each adjustment?.....oh no he forgot to point that out.
Amanda.....would you take advice from a criminal gang on how to protect your stash of gold coins?
FYI: When "Kiwisaver - Life Stages" retires, the average wage will be 104k. If you think 320k is enough to retire on you need to wake the fk up. You're going to need all of that, plus your own home, plus some form of passive income at least 50% of average wage, plus some precious metals 500-1000 oz silver 50-100 gold. That is real diversification, and will ensure you can retire with dignity.
Saving 2% is NOTHING, make it 20% and you may get somewhere, the more the better. If you believe taxpayers are going to fund your retirement, then you will have a very poor retirement.
Percious metals earn nothing unless they appreciate.....they are a defensive buy for an inflation event....and aim to take you through such an event....nothing more...
Ppl who make money are the ones who do their own research and move in and out of asset classes at the right time......
Most ppl wont be retiring in 20 years....the second Great depression and declining standards of living will ensure that.....
regards
Annoying when these people pop up selling their wares using broad sweeping motherhood generalisations such as, asset allocation, conservative funds, growth assets, and yet they never tell you what your fund is invested in, or how they do it, and the fees they extract along the way.
Mentioned the churn and burn above.
Well here is an extract from same "strategist" as in my previous article
Read and learn how it is done.
And these refer to the unreported "managers" fees , not the reported Trustees Fees.
http://www.members.optusnet.com.au/~iconoklast/rebalancing.htm
Another KiwiSaver ticket clipper.
The tax dollars contributing to his fees would be better off spent on educating people in basic financial management.
Mr Botherway says he is concerned, about what might happen to your funds in 40 yrs time?
Given the usual staff turnover in banking, it is more than likely, that in12 months, he will be working for a different bank, in another role, and couldn't care or less about your retirement account.
Incompetent....cherry picking.
The next 100 years will be nothing like the last....we are certainly going from a 30 year bull market into a 30 year bear market.....risk should be minimalised on this count alone.
Also its papering over the Great Depression by picking 100 years......a more normal case would be peak to peak....and ignoring the huge drop before us from the current debt and peak oil effects (shrinking world gdp).....high risk funds will lose heavily....60%+
Huge losses and volitility from peak oil effects.
Oh look, maybe yet more inter-generational theft....via "advice" this time......lets let the young take the risk, we'll take more fees off them as their "high growth" accounts need more managing.....
regards
The elephant in the room that Botherway neglects to mention is that the biggest wealth destroyer is the financial services industry. Which has managed to insert itself between the people (investors) and the industries that produce the wealth. And rips off anything good long before the wealth gets to us.
If he wants to fix up the final return the 'youth of today' will get out of Kiwisaver in 40 years, the financial services industry is what he should reform
So there are people in Kiwisaver who don't think much about it now. No surprise.
But there will be a seachange when those accounts start to get to the size that it starts to matter. Many more (though not all) will start to take notice of how it works and what happens.
That's when Mr Botherway and the gang will get a big fright.
I naively bought into that rubbish back in the mid 90's. I remember sitting in the room with the BNZ "private wealth manager" who assured me that a well-balanced portfolio would earn me an average 7% per annum after fees and taxes. The last 100 years guaranteed it, apparantly.
Well, they can take "the last 100 years" and shove it up their sub-second computer-traded, derivitive hedge funded, tech bubble, over-hyped IPO, get-rich-quick, rapid-growth, banker-bonussed philosophy.
And as for... "once we get to flat economic waters equities markets will be substantially higher, there is no doubt about it." ... perhaps a cold-blooded look at the last 15 years might be worth a moment's thought. Is it perhaps possible that the modern, massively inter-linked, global-monopolied, debt-driven, out-sourced economy might be subject to behavioural imbalances that are just a teensy-weensy bit different from how things were in the pre-computer age?
Compounding returns. I understand the notion of interest being applied to interest, but how does compounding returns benefit a KiwiSaving person in a managed fund, where a daily unit price is applied? No "interest" is locked in, so if there is a sharp dive of, say, 25% in equity markets, then the whole fund holding goes down 25%.
Genuine question.
The theory is that income produced from dividends or interest from the underlying assets is re invested. Similarily the growth of the share and properties in the fund should compound over time.
I can assure you that bonds and fixed interest have outperformed equities over the last 30-40 years.
Buy a home, pay it off. Take the benefots from KS while they are there. Start a small business and grow it into a big one. Sell it. Buy some equities in companies that you know inside and out.
Or get a senior job in a corporate/bank and get sweet bonuses.
I think I know what you are refering to regarding the bonds over equities assurance.
1) How many other 40 year periods did bonds outperform shares? All of them? Only a few? None?
2) If, as some say, the outperformance of bonds over shares in the period in question was due to a general reduction in yields from 8+ percent down to 2- percent, and this reduction simply cannot occur again, what use is that particular long-term historical perspective?
3) You seem to be advocating investment in only a few assets, on the hope they perform really well. On what basis do you dismiss the benefits of diversification?
4) Like most here you advocate buying a home (or put another way, investing in a single real estate asset using leverage). Are there any circumstances you can imagine in which you think it would be incorrect to buy property?
5) Nothing you write deals with risk. What if your house doesnt earn more than the interest costs, your business doesnt get going, or the few other shares you buy become duds because despite what you knew about them, sure things dont exist? Are you assuming someone else will always be there to provide a safety net?
Genuine answer Black Celebration..
Returns will compound to the benefit of the investor regardless of whether they are in the form of interest, dividends, rents or realised capital gains. If the returns are reinvested rather than withdrawn the value of the invested funds rises and , assuming the % return is the same the $ return then grows a bit as it is calculated on a higher base.
An example is dividend reinvestment. Many companies have dividend reinvestment plans which means that , instead of getting a cheque from the company , which you use to buys some new shoes or something, you get additional shares in the company. Next year when they pay their 15 cents per share ( or whatever ) dividend yiu get your 15 cents per a few extra shares . Over time it makes a big difference. Fund managers effectively do that on your behalf in a managed fund as they will use the dividends they get, bonus shares, profits on sale of some bits of the portfolio etc to reinvest in other things they expect will provide a return.
Equity prices do go up down but that does not change the theory that they will go up on average over a reasonable time frame. Bond prices rise and fall as well and most of the major losses suffered by investors in this country have been in term deposits and debentures in recent times. At least with equities you might get dollar cost averaging to work for you if you are investing regularly.
You should not take too much notice of some of the comment on this site. The only options that seem to get much support on here are gold and presumably consumption as nothing that looks like an investment in anything productive gets much of a run. I suggest a web site selling tin foil hats would be a good place for you to invest. Plenty of potential buyers on here.
Thanks Waripori
I'm still not quite there in the old understanding. If managed funds are mark-to-market in terms of striking a daily unit price (value) - then if the underlying assets have reduced in value by 25% yesterday, the fund's value reduces by 25% today. They don't lock in a value every day and then see what earnings have been achieved on the earnings tomorrow.
When experts talk of compounding returns, I think 99% of people think they are referring to locked in growth where interest is making money on interest. The grain of rice on the chessboard is often used as an example to illustrate this. I know they are not using the word "interest" but I bet most of the investors won over by the compounding returns argument will think that is what is happening - and then be shocked when their entire fund is pinged by 25%.
The benefit of compounding returns is better when applied to rolling term deposits and the like, not unitised managed funds.
I think the dollar cost averaging argument is the best way to explain the benefits of equity investments in a unit priced managed fund. It informs the investor of the volatility and the potential benefits of that. An investor can't clearly see the benefits of compounding returns as this effect is going on at fund management level and those returns may be wiped out by a bad day. I think ANZ banging on about it is borderline, given their recent history over explaining how things work to customers.
The fund recieves interest, coupons, and dividends, and they reinvest this income, buying more shares. Those extra shares bought will then earn their own income.
Imagine if a fund paid out all its income and the investor decides to reinvest it every time. If you can see the compounding in that situation then you must concede it also occurs when the fund automatically reinvests that income.
Thanks Kimble - again you explain things very well.
I suppose the issue I have is the promotion of compounding returns when explaining things to KiwiSaver investors. The more I think about it, the less I think this holds water. Often quoted is something along the lines of a man being paid 1c on day one and on each day this is doubled - after 30 days that amount turns out be a gazillion dollars. Amanda had this one the other day :
http://www.theglobeandmail.com/globe-investor/personal-finance/rrsp/take-it-from-einstein-its-all-about-compounding/article2317924/page1/
This is interesting and totally valid - until someone says "...and this is how your KiwiSaver fund works...".
This example (plus many others) carry with it the assumption that the money gained daily is locked in every day. If it truly worked like a KiwiSaver fund, then day one's 1c is not paid over until the end of the 30 days and at that time, that payment may actually be 0.75c (or it could be 2c). Yes, all income is reinvested, but if the overall value is down, then that reinvestment has the same effect as topping up the bath after the plug has been pulled out for a bit. Compounding return examples tend to have a plughole-free environment.
Wow! I did not realise there were so many people out there who can predict the future.
For the bears that are predicting armageddon. The joke is on you. If armageddon arrives, you might feel smart being in gold/bonds/cash... for about the first year or so. But, if it is all the doom you have hoped for, it won't matter what you have, if you aren't a Mad Max/beyond the Thunderdoom type then you are stuffed.
On the other hand, no armageddon, and you will regret:
a.) Being miserable for so long.
b.) Not taking a bet on productive people doing productive things.
For the bulls.
a.) Got to love an optimist.
b.) If the world doesn't end you will be in great shape.
c.) If the world does end, you are going to have bigger concerns than 'should of been in gold'.
Folks, investing is not only about asset allocation, diversification, trading, and fundamental and technical analysis. First and foremost it involves philosophy and lifestyle choices. Do I save a $1 or spend it? If you chose to save, you are optimistic about your future, you are sacrificing money now for a future where you assume you will be in a good position to put it to use (you are alive for one, and the world is stable). You are a bull so buy bullish assets. If you are saving for 30 years in the future and you are bearish then you are a fool. Spend the money now!!! In 30 years you will probably be dead.
Interesting discussion Black Celebration.
You are over complicating things if you get too involved in how funds set unit values. Compounding works however the income is generated. The important thing is that it is reinvested not spent. The fact that values go up and down does not change the theory.
The best example I have heard is entirely illustrative and clearly not a real one. If Columbus had found a bank in America when he arrived in 1492 and deposited a dollar at 5% interest he would have earned $26 in simple interest by now. If he had let the interest compound he would now have more than enough to buy the bank . I knew how much it was in 1992 when I first hear the story ( 500 years since he sailed the ocean blue ) but if you are good at exponents you can do the math.
I reckon an example closer to home works with rental property ownership. If you have an investment which is positively geared enough so the rental less expenses will cover P&I payments on a mortgage from day 1 ( this will mean actually putting some money in as a deposit ) you will be building equity. If inflation is 2% , house prices increase at 2% and so do rents you will find over a few years that the cash surplus gets a bit bigger and the rate at which you repay principal increases while the interest expense falls as that is how the table mortgage works. If you use the additional income to reduce the principal a bit quicker again then the compunding effect works faster again. Compounding needs a bit of time to do its work and , if you take this approach to property investment rather than looking for a big bang profit it seems to me to be a sensible part of a retirement plan.
You can play with these numbers as well but if you look at a property valued at say $350,000 and put say $70,000 in as deposit a rent of $400 a week would cover principal and interest at 5.5%. If you put the 2% inflators in to property value and rent and apply any excess cash flow to principal reduction I think you get a decent return on your $70,000 over say 20 years. That may even be better than flicking the 70k ( which might have been an inheritance or similar ) off your own mortgage. Problem with getting rid of your own mortgage is it frees up lots of cashflow which can then disappear on beer and baccy.
Some distance from the original question but a bit of a ramble every now and then is fairly harmless.
That's a very disciplined approach but I suppose the risk is that the property values may stall, you can't find tenants, galloping roof rot, mortgage rates increase, new taxes come in, you may need to sell quickly and you can't, and a whole slew of other variables. I know that cleverer people than me can very nimbly factor all of that in, but it seems like very hard work. Where's my beer and smokes?
Back to compounding returns - with respect, I think the fact that values go up and down *does* change things. Colombus' reinvested and compounded interest (I worked it out to be about $39bn over 500 years at 5%p.a.) is worth nothing if the thing he invests in falls off the edge of the world the day before he expects to cash up.
I know I am coming across as excessively cautious, but I'm actually not that bad. I just want things explained clearly and I think the compounding returns message hides or at least understates the volatility aspect.
The compounding story is separate from the risk story. Its like complaining that a discussion of tax efficiency doesnt address the issue of fees. Sure fees matter, but not addressing them doesnt mean the benefits of tax efficiency disappear.
The $39b investment amount would need to drop to almost zero to discredit the benefits of compounding. Even if it drops by 95%, you are still way ahead of the game.
The compounding story is important to dissuade people from thinking about their retirement savings as an effort in capital presevervation. A single percent greater return per year can equate to a massive amount of money at retirement. (I think there is a moral there about fees, for those who want to see it.)
I imagine Columbus would have realised at some point he was a bit over exposed to a single investment and started to move some of his deposits to another bank, thereby reducing his risk.
Just because you have you have money lent to a financial institution which has promised to pay you interest and let you have your money back on demand, or because you have bought a bond which promises you a set coupon and money back at a set time, does not mean the promises will be kept. Your protections against this sort of risk are knowledge and diversification. You should also not think that fixed interest investments are not subject to changes in valuation up or down. Changes in interest rates or credit quality can have a big influence. on what you will get back for a particular security on any given day, unless it is the maturity day and the issuer is still standing.
The volatility is not an issue for the magic of compounding returns and it can help if you are a regular investor. Of course if the value changes are permanent and downwards rather than a series of ups and downs you would have been better to have spent the money on a new TV.. That is risk. As Kimble says , if you have a longish investment horizon you need to be invested in a way that gives you the best after tax and fees return and not be too concerned about short term changes in value.
This is the scenario I want to avoid:
Expert - " compounding returns are like magic, you earn money on the money - and then you earn money on that reinvested money - and so on! Here's an example of how it works. Look! You end up with a gazillion dollars! Just let us look after it for you, sit back and relax."
Investor - "sounds great - count me in"
(30 years of relaxing passes...)
Investor - "How come I don't have a gazillion dollars?"
Expert - "Well, the value of the fund has gone down - obviously"
Investor - "But you said...."
Expert - "Naturally, there is going to be some volatility in these older funds."
Investor - "you didn't say anything about that..."
Expert - "I think you'll find we did (points to weasely arse-covering small print)"
Investor - "the fees are enormous - how come they weren't affected by the volatility?"
Expert - "Oh dear. It seems you are not financially literate. And anyway, it wasn't me - it was some bloke 30 years ago. Nothing to do with us here at Zarg2040 Enterprises Inc.
This is how the scenario actually plays out:
Expert - "Most of your final balance will be due to compounding of returns."
Investor - "What does that mean?"
Expert - "It means that if you save $1,200 per year in a savings account earning just 4% for 40 years, you wont just have $48,000 at the end. You will have $120,000. This is because the money you make in the first year makes its own money every year after that."
Investor - "So I double my money?"
Expert - "Yep, if you get 6%pa on average, you would have around $200,000 and that is why you would want to invest your savings in something that earns a return, because the gains you make are amplified over time."
Investor - "Ok that makes sense."
Expert - "Now lets discuss risk..."
You should update Columbus situation to today ( ie an additional 20 years ). You will be amazed at the diffrence. That is why the Retirement commisssion site has examples of starting to accumulate at different ages. It is the first few years that makes all the difference in the long run.
Having said that we all have the odd endowment policy or personal super in the draw which has been buggered as an investment by poor management ( mostly too conservative if we go back to the high inflation days in the 70's ) high expenses and up front fees. These little practical issues can obscure the elegance of the maths.
Just discussing the benefits of long term planning for retirement does not imply a set and forget approach. It is your money and you need to understand what you own and what it is costing. You especially need to understand the risk you have. It is not really something you can delegate. You have to rely on someone else to manage your Kiwisaver ( and you are mad if you are not in it at least at the minimum level ) but everything else you do is up to you.
@Kimble and Waripori - good points well made. Believe me, I am a fan of the mathematics - no question - it all makes total sense.
Just be aware that when these things are expressed in such irrefutable, undeniable, 100% certain terms by a provider - that people were sold on this exact premise many years ago when they set up those endowment policies of which you speak. So 30/40 years later, they have ended up with 5/8ths of stuff all because:
1. The returns were eaten away by the premiums needed to service some nominal amount of life cover.
2. As it happens, the fees turned out be really high.
3. The product they bought was taken off the market 15 years ago, meaning that the provider hasn't given a flying hoohah about where that money is invested for a very long time.
4. It became a "legacy product".
So when a provider (sometimes the same one!) reels out the same spiel with a straight face in 2012, watch grandad snort derisively and warn everyone he knows to steer clear.
He will say that the provider said the same things in 1970 and look what happened! You won't ever hear the provider's side of the story. And because it's a "legacy product", no-one at the provider will even fight their own corner, if asked.
Yet there is hope. KiwiSaver is not like that - there is no life insurance, fees are much lower, and regulated, there is a great deal of choice re funds and providers. Already, people are looking at their balances and grinning broadly. It's great. Everyone should be in it - so why aren't they?
It isn't a lack of financial literacy that turns many people off - it's direct experience of what has actually happened - and how providers have behaved when things don't go to plan. Providers would do themselves a big favour by showing some humility and respect and not branding the public as a bunch of thickos.
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