Investment in KiwiSaver become very popular over the last few years. But is it really as good investment as the government, media and numerous advertising campaigns suggest?
If we look at the KiwiSaver as a whole then yes, there are few irresistible perks like the $1000 joining bonus and then $500 yearly contribution towards funds management fees paid by the government.
Another claimed benefit is the supposed employer contribution matching employees contribution. So, at the first sight it all looks great, but let’s look at some of the other aspects more closely.
(1) KiwiSaver joining bonus $1,000
Yes, $1,000 sounds great. But this is only a one-off carrot. It can be also viewed as a bribe to joint something that people otherwise would not join.
If the KiwiSaver is such a great investment why the government needs to bribe people to joint in?
Worth schemas would have be snapped up by savers regardless of any joining bonuses.
(2) Contribution towards fund management fees
One thing that evades my understanding for years is why should anyone pay “management fees” for their investment.
When you put your money into savings account, you don’t have to pay the bank “management fees”. To the contrary – it’s free and on top of that you receive interest. Management fees can be justified for share funds, however, many members of KiwiSaver are in conservative funds.
These funds invest mostly in cash-like assets similar to assets the banks invest from savings accounts and deposits.
Management fees in conservative funds are simply unjustified and can be treated as government providing free money to the KiwiSaver funds managers. In another words it’s plundering of public (tax) money into private coffers.
Another important thing to remember is that after couple of years the balance of ones KiwiSaver investment will be higher than it was at the beginning. And the “management fees” are paid as a percentage of the total balance.
By that time the government contribution towards management fees may be well below their actual level and will not cover them fully.
(3) Employer’s contribution matching employee’s KiwiSaver payments
To be honest, this one is a joke. Current legislation allows companies to take their “contribution” from employee’s wages.
How it works – when starting employment the company signs with the employee contract specifying the “total remuneration package” which also includes the employer contribution.
So, if the employee joins the KiwiSaver and decided to contribute let’s say 2% of his or her wages then also the employer’s contribution 2% will be taken out of the “total remuneration package”.
At the end it means that employee will invest the whole 4% into his or her KiwiSaver.
But, if we look at the perks offered by the government to join and invest your money into KiwiSaver from the broader perspective, they are not as great at they seem.
Even with these carrots the KiwiSaver is a questionable investment. Without them it would be very poor investment, taken into account their current returns and fees.
In fact many KiwiSaver funds would provide negative returns. Compared to even basic term deposits and savings accounts, KiwiSaver as a whole performs badly.
And let’s stress that you should judge every investment on it’s real performance, not performance deformed by unsystematic government incentives.
But that’s not all. Let’s focus on few more factors concerning investments in KiwiSaver:
(A) You must hand over money to funds, can’t invest it yourself
Why the only way to invest your money for retirement through KiwiSaves is to hand over your hard earn cash to the KiwiSaver Funds?
Why didn’t government allow you investing it by yourself?
There can be similar provisions put in place that restrains you from withdrawing the retirement money early. In Australia you have freedom where and how to invest, you can establish your own Investment fund with you being the only contributor.
Here, the only option you have got is to hand over money to someone else and then pay them “fund management fees”.
This is highly undemocratic and smells government corruption when political and big business interests joined forces together against their citizens.
(B) World’s Financial Crises and current Financial Markets volatility
To be honest, capitalism and financial markets as we know them are finished. Since the beginning of the financial crisis in 2008 there has been virtually no progress.
The recession continues and financial markets are further deteriorating. Governments around the world have done nothing to solve causes that led to the current crises.
In fact, all their “remedies” have only deepened unbalances and only postponed coming crash of the world financial markets.
The crises was caused by over leverage, lack of regulation and excessive debt. What the world governments and banks have done to solve the crisis – more debt (money printing), no financial markets regulation and no or insignificant deleverage.
Put it simply – current capitalism model is unsustainable. It may hold for couple of more years, but do you honestly believe that all of it will still be here in the same form in 30 or 40 years time when you retire?
Simple statistical probability calculation would show that the chances for your KiwiSaver investment to be still around in that timeframe are almost negligible.
There are numerous examples of Pension Funds going under, even those funds hundreds or so years old. Last financial crises spelled the end to many of them overseas. And the last financial crises is nothing in severity compared to what the next one will be.
There are other better, safer, much more reliable and sounder ways to invest your money than throwing it into unprofitable and insecure KiwiSaver.
(C) KiwiSaver is not guaranteed investment
Well, you may say that all investments are unsecured. That’s true, but in case of let’s say bank, the probability of bank going down is much lower that probability of the investment fund going down (or assets devaluing in that fund).
Technically KiwiSaver funds are separated from their management. But there is no guarantee that the assets won’t devalue very significantly, especially shares and private bonds.
Even cash funds holding government bonds may go under. We have all seen states around the world going bankrupt (Greece, Argentine, Ireland, Island). There is no guarantee that this country won’t go the same path one day.
So, what are the alternatives?
Well, the best alternative (don’t want to sound too conservative now) are your kids. There is no better investment for your retirement that growing up your own kids.
No other “modern” financial investment vehicle have ever beaten this one. But for those who don’t want or can’t have kids, there are still plenty of other options.
You need to invest into real assets: land, property, gold, silver, build own business that can be later sold or managed by hired management after you retire.
KiwiSaver is nothing more than nicely packaged financial speculation and gamble with the government’s stamp of approval. Forget about castles in the air, go for the real stuff.