kiwisaver, volatility

KiwiSaver members could miss out on $3.5 billion in retirement

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Amidst the economic turmoil caused by the coronavirus pandemic, falling KiwiSaver balances may be a nerve-wracking sight for KiwiSaver members. An estimated 50,000 New Zealanders panic moved into more conservative KiwiSaver funds in an attempt to minimise potential further losses on their KiwiSaver account. Here’s why panic switching your KiwiSaver fund type may lead to lower retirement returns.

Switching KiwiSaver Funds in a Pandemic

When you switch your KiwiSaver fund to a more conservative fund, you are able to cushion the current fluctuations of your KiwiSaver balance, but this also means you can end up losing more on future returns. In other words, when you choose to move to a less risky KiwiSaver fund, you are avoiding the steep drops in value, but will also miss out on the higher potential returns that come with holding riskier investments. 

In the first quarter of 2020, about 3.74% of KiwiSaver Growth Fund members and 3.01% of KiwiSaver Balanced Fund members switched to more conservative funds. Westpac Growth and ASB Growth funds were hit the hardest - losing 6.87% and 6.4% of their investor base respectively.

National Capital estimates the combined impact of Kiwis panic switching their KiwiSaver fund during the coronavirus outbreak to have the potential to reduce collective investment gains by up to $3.5 billion.

Why is My KiwiSaver Balance Falling?

It is important to remember that your KiwiSaver account is not like a savings account where you keep your money. Rather, it is an investment account where you’ve bought a range of investments in things like shares, bonds, and property. The value of these investments go up and down with the share market, meaning your KiwiSaver balance will go up and down too.

When you hold investments in things like shares, it means you own part of that business. So when events like the coronavirus outbreak occur, the profits of these businesses are expected to be lower due to factors such as reduced production of goods and reduced demand from customers. With a more negative outlook on the future profits of these businesses, people will pay less to own part of those particular companies. As a result, the value of a share in these businesses decrease, and this drop is reflected in your overall KiwiSaver balance.

Being an investment account, you can think about it like this - your KiwiSaver balance doesn’t show how much you “have”, instead it shows how much your combined investments are “worth” at a certain point in time. This means when the value of your investments fall, so will your KiwiSaver account.

Will My KiwiSaver Balance Go Back Up?

With a high level of market uncertainty and new information coming out each day, the future outlook on businesses and markets change continuously. Although no one can predict the future, history tells us that markets will recover from these unusual events. This means that with time, your KiwiSaver balance will recover.

Personalise Your KiwiSaver Investment Strategy

When deciding on a KiwiSaver Investment Strategy, it is important to consider factors such as the level of volatility you are comfortable with and how soon you would like to use your money. Even if you are wanting or planning to retire this year, remember that you can and most probably will need to keep your money in your KiwiSaver account for longer. 

If you personalise your KiwiSaver investment according to your needs and goals, you will be less bothered by market swings and impacts of global events. After finding the right KiwiSaver fund for you, all you will need to do is stick to it until your goals or situation changes.

National Capital is here to help you and your KiwiSaver to be better off in the long run. By offering advice on what you should do with your KiwiSaver account, we can help you align your KiwiSaver investment strategy to your goals.

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