It’s always good to stay on top of your money. Your KiwiSaver account can be a big part of your financial future, and there are many reasons you might consider shifting how it’s invested. At the same time, make sure you keep your own best interests in mind.
Why are you thinking of changing funds?
You could be looking for greater returns, nervous about the ups and downs of a higher risk fund, saving for a house deposit, or worried about the time left to retirement. If you’re thinking about making a change, here are some things to consider.
Does changing funds fit with your goals?
Is KiwiSaver your main nest egg? Are you relying on it for the future, or is it a nice top-up to the rest of your savings? Different circumstances might give you different KiwiSaver goals.
Not everyone is saving towards retirement. Some people use their KiwiSaver account to help save for a first home, for instance. If this is your goal, you might consider switching to a lower risk fund to reduce the risk of losses to your KiwiSaver account if the markets drop in the run up to buying your first house.
Similarly, if you’re about to retire – congrats! – it might be worth considering a switch to a lower risk fund for the same reason.
Be careful of the chase
Switching KiwiSaver funds to match your changing goals and needs can be a smart move. But make sure to do this in your own best interests, and not as a reaction to a short-term loss.
It’s normal for markets to go up and down. A good rule of thumb is that shares can fall by up to a third every five to seven years and take five to seven years to get their value back. This means an investment can deliver no returns at all for long periods, which can be scary. But the payoff is that you can generally expect returns to increase? over time if you hang in there.
Because of this, people can hurt themselves by panicking or chasing quick returns. Say the market drops and your KiwiSaver account suffers a loss. To protect the rest of your investment, you switch out of a higher risk fund to a lower risk fund, then switch back into the higher risk fund when the market improves again. By doing this, you risk crystallising any losses you’ve already experienced. You’re selling out of assets when prices are lower so you receive less, and you might miss out on the opportunity to make gains when the markets go up. Be careful of the chase.
How much time do you have?
Broadly speaking, the more time you have to save, the more risk you can think about taking. Time gives you the space to regain any losses and benefit from potentially higher returns over a longer period. So a 20-year-old can generally take more investment risk than a 50-year-old. If you have a long while to go until retirement (say, more than 10 years), you might want to consider a higher risk investment fund.
What’s your attitude to risk?
No matter how young (or young at heart) you are, you need to balance your desire for returns with your attitude to risk. This is a gut-level feeling for many people.
In general, over time, taking a higher financial risk means you expect a higher return. A low-risk approach (like leaving your money in a bank account) is comparatively less risky, but doesn’t have the potential for greater returns that a higher-risk investment like a stock portfolio has. The flip side is that the value of higher-risk investments go up and down, and it can be stressful seeing your money take a ride.
KiwiSaver investment funds work the same way, with each type of fund (conservative, balanced, and growth) making a different trade-off between risk and return. Whatever your appetite for risk – whether you are totally risk averse, totally open to investment, or somewhere in between - you need to tailor your investment approach to make sure it matches your approach to risk.
Make the most of info and tools
Changing your KiwiSaver investment fund could have a significant effect on how much money you’ll end up with for your retirement. It’s not something to take lightly, but info, tools and advice are available to help you make the best decision.
At the Kiwi Wealth KiwiSaver Scheme, we offer our members an online retirement planning tool that not only shows you an estimate of what your future income from your KiwiSaver account could be, but allows you to review the investment fund or funds you are currently in, and see how switching funds could influence the amount you might have available when you retire. And if you decide you need to make a change, you can do it right there and then – simple!
Even better – if you are thinking of buying your first home, and want to use your KiwiSaver account to help with your deposit, our tool has a feature to help you out. Just as the tool calculates how much money you could have in retirement, it can also work out how much you could have to put towards your first home.
The tool takes your personal info and your KiwiSaver account details, asks you to select when you want to make a first home withdrawal, and then recommends the most suitable fund for someone with a goal and timeframe similar to yours. You can explore various fund types, contribution rates, and timelines, to see the effect different decisions will have on your options and how much you could have to put towards your first home.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your personal financial goals and circumstances from an Authorised Financial Adviser before making any investment decisions.