START SMART, FINISH WEALTHY
North & South, 14 April 2016
This article was originally published in the May 2016 issue of North and South.
How to control your retirement destiny – with personalised investment advice from the experts.
So, you think you’re doing great. You’re on $90,000 a year and have a pretty comfortable lifestyle. You don’t think twice about going out to dinner or buying that new shirt you spotted in the shop window. When the latest holiday deal to Hawaii pops up you’re in, and the phone, power and water bills are automatically paid by direct credit.
Yes, the rates bills hurt, and the teenage kids are a sinkhole for money, but you’re chipping away at your mortgage and you have a few thousand in the bank as well. Life’s pretty sweet and you’re too busy enjoying yourself to worry about what might happen in another 20 years.
That’s a typical picture, says Craigs Investment Partners head of client services Stephen Jonas. “People like to live in the here and now. We talk about what we did over the weekend, not what we might be doing in 20 years.”
It staggers him that half a million people in the three million-strong New Zealand workforce are still not signed up to KiwiSaver, which he says is by far the best savings scheme available. If they stopped to think about what their future might be like without the luxuries they take for granted now, he says, “they might actually find it quite unpleasant”.
What if your take-home pay suddenly dropped from $1300 a week to just $374 – the amount a single person earns on the pension now? You probably couldn’t afford that ultra-fast phone and broadband package. After you’ve paid the registration and warranty on your car, you’d find it hard just filling it up with petrol. Suddenly, replacing something like your fridge would become a big-ticket item, and health insurance unaffordable.
If you want to retain your current lifestyle, Jonas says, you’ll need to make up the near-$1000 a week shortfall between your current salary and the basic pension. That’s $50,000 extra a year and, working on a five per cent return, you’ll need $1 million to generate it.
It takes at least 20 years to accumulate that sort of capital, says Jonas, but it’s never too late to start, by signing up to KiwiSaver. “Taking the first step is the hardest, but every day you defer you’re missing out. The power of compounding interest means that if you put a little aside sooner, you do a lot better than putting in a lot later on. And it has much less impact on your lifestyle.”
Crucially, when comparing the savings of people on low, medium and high incomes, those in the best position on retirement are the ones who start saving earliest. On a $90,000 salary, if you contribute three per cent and your savings earn five per cent after tax, a delay of just one year will see your final account balance $17,000 lower after 25 years. Delay starting by five years and the difference is $77,000.
There is no downside to joining KiwiSaver, says Jonas, because not only does your employer contribute to your savings, so does the government. Even though the government’s $1000 kick-start contribution was canned last May, savings of a minimum of $1042.86 a year qualify for an annual tax credit of $521.43.
With the average KiwiSaver balance under $20,000, Jonas says most people have signed up with providers who offer a small choice of plans. But in coming years, when the average nest eggs will be closer to $125,000, he believes more and more people will seek the advice of a firm like Craigs IP.
“The power of compounding interest means that if you put a little aside sooner,
you do a lot better than putting in a lot later on. And it has much less impact on
Craigs Investment Partners, Head of Client Services, Stephen Jonas
"New Zealand is a funny little place. People get their financial advice from a lot of different places – from people they know, from reading the paper or what they hear on the radio. But they’re soon going to want a lot more financial advice and have a greater input into how they invest their money. We help people construct a portfolio of investments that suits them. With more than 200 securities to choose from, you can spread the risk across different markets or managed funds.
“The younger you are, the more risk you can assume, because you have longer to recover from lower returns in any single year.”
But Jonas says the “life stages” approach adopted by other providers – you automatically become more conservative with your investments as you age – is an over-simplification, because everyone’s circumstances are different. With the guidance of a Craigs IP expert, you can tailor your KiwiSaver portfolio and control it as your circumstances change.
All You Need to Know
- Craigs IP has 16 branches throughout New Zealand, from Kerikeri to Invercargill – and more than 120 NZX-qualified investment advisers.
- Craigs’ unique kiwiSTART scheme enables clients to select their own shares or funds to create personalised KiwiSaver investment portfolios.
- With Craigs, you have access to one of NZ’s largest research teams of market analysts, providing easy-access reports on companies and other investment opportunities.