Welcome to the December 2024 Manager’s Perspective! Each month, where relevant, InvestNow will ask our investment managers some questions surrounding our theme of the month. This month we asked Mint and Pathfinder some questions to help you better understand their investment styles, strategies, and perspectives on Retirement Readiness. Read the questions and their responses below.

Q1: Given New Zealanders get access to NZ Super from age 65 onwards, is it still important for Kiwis to separately save and invest for their retirement?

Yes, absolutely, it is critical for Kiwis to save and invest separately for their retirement. NZ Super provides a foundational income, but it is designed as a supplement rather than a comprehensive solution for a comfortable retirement. Factors to consider include:

• Lifestyle Needs: NZ Super currently offers a modest amount that may not cover all lifestyle aspirations, particularly for travel, hobbies, or unforeseen expenses. As it stands, a couple on tax code ‘M’ would receive $401.74 each per week in retirement from their Superannuation payments. For many, this would not cover their expected retirement lifestyle.
• Inflation: Higher levels of inflation may erode the purchasing power of the income produced by NZ Super. Typically, Super payments have increased with inflation, but there may be periods where it doesn’t keep up or broad-based inflation adjustments may not be reflective of your specific basket of goods. Having additional savings or investments helps maintain financial flexibility.
• Longevity Risk: With access to improving healthcare, more people are living longer, which means retirees may need income to last decades, not just a few years. Supplementing NZ Super with additional savings helps ensure you won’t outlive your funds.

In short, independent savings and investments provide security, freedom, and resilience in retirement. KiwiSaver is an obvious solution to provide additional funds at retirement. One piece that is often overlooked is contribution rates. Most people contribute the minimum 3% to their KiwiSaver, and their employer will typically match this. What many people don’t understand is the profound effect that increased contribution rates can have on their KiwiSaver account at retirement.

Q2: How should New Zealanders generally approach investing once they hit age 65 and retirement? Is this the time to ‘de-risk’ and cash out completely, or is it worth remaining invested?

It’s generally not advisable to cash out completely upon retirement. While some degree of “de-risking” is prudent, remaining invested can help sustain income throughout retirement. A popular and effective strategy our clients often employ is ‘The Bucket Strategy’. Here’s how it works…

Bucket 1

Time frame: Short term
Types of investments: Bank accounts, Term Deposits
Balance in Bucket: 12 Month’s Living Expense

Bank accounts and term deposits provide minimal returns, but also will not fluctuate in capital value. Therefore, these types of investment provide certainty as to how much you have available to you at any given time. This should be used to cover everyday expenses.

Bucket 2

Time frame: Medium-Term
Type of investments: Fixed Interest, Bonds, Moderate, Income and Conservative Managed Funds
Balance in Bucket: 4 Years’ Living Expenses

Fixed-Interest and conservative investments can provide higher returns than bank accounts and term deposits and, although the balance will be somewhat unpredictable over the short-term, it can generally be relied upon to meet medium-term commitments.

Bucket 3

Time frame: Long-Term
Type of investments: Shares, Property, Aggressive Managed Funds
Balance in Bucket: Surplus

Shares and property are likely to produce investment returns in excess of other types of investments over the long-term, but your investment balance can fluctuate significantly over the short-medium term. However, this should give you the returns required to fund a higher retirement income for longer.

In a practical sense, Bucket 1 is supplemented by your fortnightly NZ Super payments. Assuming you spend more than your NZ Super payments, you will tip some of Bucket 2 into Bucket 1 to cover living expenses.

Because you are using Bucket 2, you will then top up Bucket 2 using funds from Bucket 3.

This strategy has proven to be effective as it allows retirees to reap the rewards of staying invested in growth-oriented investments (via Bucket 3) whilst meeting shorter term living expenses. It also provides the flexibility to keep invested in growth-oriented assets during market-downturns. No strategy is perfect, I would recommend talking to an independent financial adviser to decide what will work for you.

Q3: What are the three most important considerations Kiwis should be mindful of in order to achieve a successful retirement?

1. Maximising the KiwiSaver opportunity:
There’s a good chance that KiwiSaver will become most Kiwis’ largest financial asset behind their family home. These are the steps we recommend to maximise the opportunity.

• Fund type: Fund types range from defensive to aggressive. If you’ve got a long time until you intend to use the funds, there’s a good chance you can employ more risk in your portfolio. There’s plenty of tools online to help you decide which type of fund is right for you.
• Fund provider: Not all fund managers are created equal. At Mint, we believe in conducting detailed research on companies and making decisions around what we invest in accordingly. Luckily, InvestNow has a multitude of funds for you to choose from when investing your KiwiSaver.
• Contribution Rate: As stated earlier, increasing your contribution rate can have a tremendous impact on your KiwiSaver balance at retirement. The power of compounding returns means even an extra 1% or 2% now could add hundreds of thousands to your retirement lifestyle.
  If you manage these steps accordingly, you should be in a good position to have a very healthy KiwiSaver account by the time you need it. There are many financial advisers in New Zealand that can aid you in this process. If you’re unsure, the team at InvestNow will be able to refer you to a professional adviser that can help you.

2. Balancing Risk and Return:

• While having a strong KiwiSaver plan will be very helpful, it is useful having a separate savings plan as well. You never know when you may need funds to call on, and you may even find yourself in a position to retire earlier than 65. It’s important to view both KiwiSaver and NZ Super as a supplement to your retirement income, not a comprehensive solution.
• Diversification is key – it’s important to have a strategy across your investments to ensure it is suitable for your goals. As you get closer to retirement age it would be reasonable to move investment allocations away from volatile assets such as growth funds into more stable assets like income funds.

3. Budgeting and Longevity Planning:
If you take the time now to set an achievable retirement plan, you will thank yourself in the future. Having the peace of mind to know you can make the most of your golden years, travel the world, spoil the grandkids, is invaluable. Having a strict savings plan will help you achieve these goals, using Managed Funds also provides you with the liquidity to know you can withdraw the funds if you need them suddenly. Once you’re in retirement, you will still need to manage your strategy and make necessary adjustments. Here are some tips.

• Avoid withdrawing too much too soon. Many investment providers allow you to set up regular withdrawal payments from your KiwiSaver and investment portfolio. This means funds can come into your account weekly or fortnightly (just like your Super) and ensures you don’t withdraw too much.
• You may live longer than you think – it’s always good to be considered with your approach and have the necessary funds to cover unexpected medical bills etc.
• You may have trouble spending all your money! This one really surprises me, the most common sentiment I hear from advisers is ‘I can’t convince my clients to spend their money’. It sounds crazy but the reality is, most of your spending in retirement will take place in the first 10 years when you are typically travelling or doing a variety of activities. After you’ve ticked off a bunch of bucket list destinations, your spending trends begin to drop. This isn’t necessarily a problem, but it is important to review your situation on a frequent basis to make sure you’re making informed decisions.

You may have noticed those last 2 points contradict each other. You’re probably thinking ‘Should I be more cautious in case I live too long?’ or, ‘Should I spend more as I’ll have plenty?’ There is no right answer, every situation is different and can be difficult to judge. This is why I firmly believe in enlisting the services of a licensed Financial Adviser. A Financial Adviser has the qualifications and experience to help you navigate your way through your ‘retirement planning journey’ (Accumulation Phase) and well into your ‘retirement spending’ (Decumulation Phase) to ensure you have a secure, fulfilling and flexible retirement lifestyle.

Disclaimer: Matthew Hanchet is the Head of Retail Distribution at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here.

Q1: Given New Zealanders get access to NZ Super from age 65 onwards, is it still important for Kiwis to separately save and invest for their retirement?

Personal circumstances, lifestyle and your plans for your ‘golden years’ are all factors that influence a financial strategy for retirement.

The New Zealand Retirement Expenditure Guidelines, published yearly by Massey University Fin-Ed Centre, show the harsh reality of Superannuation’s shortfall when compared to average living costs (2023 data).

Looking at the numbers, the NZ Super of a 65-year-old living alone without a dependent child tops out at slightly under $500 per week, with a partner you can expect $400 per week each. With the couple’s average weekly spending sitting at closer to $1,000, it’s clear that on Super alone, Kiwis are falling short by hundreds of dollars.

So the statistics tell us that there will likely be a gap between the average retiree’s income and their expenditure when only relying on NZ Super. The next logical, future-thinking, question is then, “how do we finance that deficit?”. One answer, for 3.5 million current members (or two thirds of New Zealand’s population), is KiwiSaver. Another answer, yet to be provided adequately or equitably at scale, is personal finance education. As a side note, I see the combination of those two as the retirement holy grail and I see it as our responsibility (managers, advisers) to elevate both wherever possible.

Q2: How should New Zealanders generally approach investing once they hit age 65 and retirement? Is this the time to ‘de-risk’ and cash out completely or is it worth remaining invested?

If you asked someone what their highest priorities were in life – during their peak earning years – family and health would likely be alongside, if not above, money. However, once you stop earning and start de-accumulating wealth, money can end up being the most important thing. Not being able to replace what you spend focuses the mind and all of a sudden, there’s a realisation that wealth helps you devote more time to family and health.

The question we recommend asking is ‘What do I need to support my lifestyle in retirement?’. This depends on many things, and for many, it’s closely tied to the legacy you want to leave behind.

I have encountered cases where NZ Superannuation covers most of someone’s basic expenses. They don’t travel internationally, or they might grow their own vegetables, for example. That’s quite possibly how they’ve always lived, so there’s no major change required. But that’s not going to suit everyone.
By being involved in the financial services sector and through engagement with advisers, we know the levers to pull to help match expectations with resources.
This formula for ‘success’ looks like: ‘X’ wealth, producing ‘Y’ return, supporting ‘Z’ expenses.

Keep in mind that the more expenses you have, the higher the return you want, which means investing in higher-risk funds. This is the opposite of what retirees instinctively want to do with their (finite) money.

Wealth becomes more of a focus when we can’t replace it. We de-risk so we know what we have and because, as we get older and our runway for making more money shortens, our perception of risk is heightened.

With that in mind It’s worth considering the risk-to-reward ratio.

Pre-GFC, banking clients were earning around 8% on term deposits. For many, this supported a great lifestyle and let’s be honest, we tend to spend what we earn. Fast forward 16 years and that same deposit is earning close to half that rate and reduced further again by tax and inflation.
So, should we consider cashing out at retirement? If for peace of mind, you need as much certainty as possible in retirement, consider de-risking. If you’re comfortable with risking some of your capital to generate more, then that’s also a good strategy.

Q3: What are the three most important considerations Kiwis should be mindful of in order to achieve a successful retirement?

1. Your lifestyle and what matters most to you.
Think about how you want to live during retirement and old age. This is inherently subjective, and I encourage everyone (regardless of age) to think about this, and then build a strategy around being able to achieve it.

2. Re-evaluate often.
Markets are constantly changing and evolving. Your desired retirement lifestyle is likely to change and evolve, too. Revisiting and adjusting your portfolio and your ambitions is imperative when planning for retirement.

3. The principle of kaitiakitanga.
I believe we have a responsibility to ensure future generations inhabit a world we’re proud to leave behind. At Pathfinder, we invite you to consider what your investments are funding; are they promoting environmental and/or social degradation? Or are they funding solutions to the problems we could be leaving behind? Your investments express your values – what do you want them to say about you?

Disclaimer: This article is intended to provide you with general information only. It does not take into account your objectives, financial situation or needs. Pathfinder Asset Management Limited is the issuer of the Pathfinder KiwiSaver Plan, and Pathfinder Managed Funds. Product Disclosure Statements for the offers are available at pathfinder.kiwi. We recommend you seek financial advice prior to making investment decisions.

Disclaimer

The following commentaries represent only the opinions of the authors. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement or inducement to invest. All material presented is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice.

This article is made available by InvestNow Savings and Investment Service Limited (“InvestNow”). The information and any opinions made within this article are those of the named authors and the organisation that they represent as at the date of this article and are subject to change without notice. InvestNow, its directors, officer and employees make no representations or warranties of any kind as to the accuracy or completeness of the information contained in this article and disclaim liability for any loss, damage, cost or expense that may arise from any reliance on the information or any opinions, conclusions or recommendations contained in it, whether that loss or damage is caused by any fault or negligence on the part of InvestNow, or otherwise, except for any statutory liability which cannot be excluded. This disclaimer extends to any entity that may distribute this article. This article is not intended to be financial advice for the purposes of the Financial Markets Conduct Act 2013, as amended by the Financial Services Legislation Amendment Act 2019. In particular, in preparing this document, InvestNow did not take into account the investment objectives, financial situation and particular needs of any person. Professional investment advice from an appropriately qualified adviser is recommended taken before making any investment decision. 

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