Out of the frying pan into the fire?

Michael Lang

By now many New Zealanders have successfully navigated their way out of the default scheme they were randomly allocated to, into more growth-orientated schemes. The move has been a good one, with investors accumulating at least an additional $800 million over the past three years, based on NZ Funds’ estimates. But will it be a case of out of the frying pan and into the fire?

Growth-orientated schemes can be a double-edged sword; while their returns are higher than income-orientated schemes over the long-run, they can deliver significant losses over the short term. In some cases shares, the primary driver of growth schemes, can take more than a decade to recover from a slump. And the recovery times assume investors do not panic and switch to cash, and do not make any withdrawals from their scheme until it has fully recovered.

This is bad news for New Zealanders approaching retirement. To get the most out of their scheme, most New Zealanders will need to make at least two KiwiSaver switch decisions in their lifetime, more if they use KiwiSaver for their first home purchase.

The first switch is likely to be out of a default scheme into a growth scheme. This increases the value of their account at retirement. A second switch decision should then be made thirty or forty years later as they approach retirement. This is a switch out of a growth into a more balanced scheme (that is a mix of income and growth assets). This switch helps preserve the capital sum they have accumulated and prepares the assets for the regular withdrawals that will fund their retirement.