Retirement decisions based on science not spin

Paul van Wetering

Some providers are spending seven figures annually to promote their various investment propositions. And as one would expect, if you let the ad executives loose, the key messages are, well… “loose”.

In addition to surveying clients to determine what they want out of KiwiSaver (see Good Returns article “What New Zealanders want from KiwiSaver may surprise you”), NZ Funds has been researching what really determines how much money a KiwiSaver member retires with. The answers are logical and intuitive to
long-term practitioners of financial advice, but will no doubt come as a shock to fans of Mad Men. 

To answer the question: “What matters most in maximising KiwiSaver by retirement?” the NZ Funds Wealth Technology Team started with an 18 year old on the average full-time youth earnings of $38,324 per annum. The 18 year old’s earnings increase by 3% each year until they retire at age 65. In this way
they approximate the national average wage of $68,588 per annum (with adjustments for expected inflation). The impacts of different variables were measured, holding all other factors constant.

Asset allocation is the largest single determinant of retirement wealth (which will come as no surprise to financial advisers). Re-orientating a portfolio from 100% Income (default) to 100% Growth adds an additional $950,000 by retirement. Obviously, this comes with a higher level of volatility which may not match the investor’s risk appetite. Interestingly, even a transition from 100% Income (default) to a diversified portfolio of 40% Income and 60% Growth, increases the terminal value by $429,000, while a life cycle process can add as much as $931,000.