INVESTMENT: Saving Grace – Investing for the future

Even the most comfortably paid manager could feel little unnerved after visit to the Retirement Commission website. While most people want retirement income that finances fun and opportunity as well as the essentials, fewer take the time to sit down and work out exactly how much money they need to deliver it.
According to the Commission’s online calculators, person wanting to retire in 15 years on 70 percent of $120,000 will need to have capital of around $600,000. From zero savings position, that translates to savings and/or return on investments totalling around $2700 per month or $32,400 per year for the next 15 years.
For some senior managers and executives, such savings goals are within reach and may even be underway. But how many of us have saving and investment firmly within our sights? Are we instead the big spenders and rotten savers some economic commentators say we are?
At first glance, our financial prowess as nation does appear weak. An April 2007 OECD economic survey of New Zealand describes the country as having “large external deficit, very low household savings and still-strong inflation pattern”.
The survey also reports that while Australia has household saving rate of 0.1 percent, the United States 1.7 percent, and Japan 6.8 percent, New Zealand’s is dismal minus 6.9 percent with household debt accounting for, gulp, 160 percent of disposable income. However, while statistically New Zealanders spend $1.15 for every dollar they earn, this doesn’t necessarily mean the entire $1.15 has been spent in areas that don’t deliver return, says retirement commissioner Diana Crossan.
“Household debt has definitely gone up, but so has the value of assets so people think they can borrow more. We don’t talk about saving any more, we talk about financial preparation for retirement,” says Crossan.
She says young people may be better off spending savings on furthering their education to ensure they slot into higher income bracket in the middle years. Similarly, it may be wiser for ‘middle-lifers’ to pay off the mortgage before beginning to save. Other people find it important to financially help their children to buy house or start business by providing ‘early inheritances’, family loans, or even ‘passing on’ family home or farm.
“People with farms may not be savers, but they may be extremely financially well prepared for retirement. Others want to live their lifestyle now and are not saving when they should be; some are saving too much so that the life they are living now is not [enjoyable],” says Crossan.
What constitutes savings or investment is therefore not always obvious. Nor are the long-term effects of such ‘hidden investments’ on the economy.
Financial savvy Mark Weldon, CEO for NZX, is also hesitant to brand New Zealanders ‘poor savers’. He says wealth and investment is measured in different ways and New Zealanders can generally be relied upon to think for themselves and obtain good advice.
“There seems to be whole lot of debate around whether New Zealand has savings problem. But that question, if it ever was question, has been hijacked by people like [author and consultant] Michael Littlewood who rave on and on about our poor savings record,” says Weldon.
Weldon says more New Zealanders are selling small businesses for significant gain and are not missing share market opportunities either.
“The first quarter of 2007 showed $90 million net fund inflow into the managed fund industry – that’s the most for very long period of time,” he says.
Tim Jenkins, head of Mercer New Zealand, says business executives tend to think more widely about retirement savings than people at other levels of employment, are more likely to have an investment property and share portfolio, and to have achieved financial literacy.
That, by the way, is something the Government would like every New Zealander to have – from 2009, it plans to introduce financial literacy learning to schools. But Crossan says The Financial Knowledge Survey, which the Retirement Commission conducted with ANZ and the Ministry of Economic Development in 2006, found that quarter of New Zealanders didn’t know what ‘equity’ meant and half did not understand compound interest.
“There were people in the top income and asset brackets that showed low financial literacy – top surgeon may not know how to deal with money at all,” she says.
Public purse incentives In addition to personal investments and savings, New Zealanders have retirement income from government superannuation payments, currently $277 per week for individuals and $426 per week for couples. (Weldon says with more than 600,000 New Zealanders on fully funded superannuation entitlement, no government will put those votes at risk.) While super rates are modest to say the least and may be affected by means testing or lift in eligibility age over time, investment analysts we spoke to say they nevertheless ‘top up’ the desired retirement income and lessen the amount people need to save during their working years. As such, national superannuation should not be discounted when people undergo financial planning for the future.
Another scheme about to factor in the investment lives of thousands is KiwiSaver, the opt-out retirement savings scheme which will see the Government deposit $1000 into each KiwiSaver account, employees contribute four or eight percent of their pay, and employers receive tax breaks for subsidising employee contributions. There’s been talk KiwiSaver should be made compulsory as Australia’s superannuation scheme is, but Weldon is not alone in saying compulsory saving probably doesn’t suit the New Zealand psyche and the current KiwiSaver set up is likely to prove adequate.
“Although KiwiSaver is opt-out, behavioural theory will tell you that people are inert and will not opt out; then there’s the tickler of the $1000 from the Government,” says Weldon.
Crossan agrees there is “no appetite” for enforced savings in New Zealand.
“The Australian scheme came in at time when things were right for Australia; it’s crazy to compare. Australians are paid more, and following [compulsory superannuation] lot of the savings in Australia in other areas initially declined,” she says.
Mercer’s Jenkins says KiwiSaver may be the first opportunity employees of small businesses have had to get wholesale rates on retail investment scheme – to date, cost effective workplace super schemes have not been available to small businesses. “Very high” earners can also enjoy the tax advantages of KiwiSaver as well as making larger investments in other areas. But for everyone, the most important focus is the need for investment diversification, says Jenkins.
It’s worth noting that while there are six IRD-appointed KiwiSaver default providers – AMP, ASB, AXA, ING, Mercer and Tower – employers and employees can choose alternative KiwiSaver schemes. Just one example is the ‘Gareth Morgan KiwiSaver’ scheme. Director Gareth Morgan recently told the Stuff website “his” KiwiSaver will have single fee covering all expenses, no capacity to create ‘reserves’ which can later be acquired legally by fund managers, and no pooling and unitisation so that KiwiSavers can see what they own. Morgan also told Stuff the past two decades of long-term savings in New Zealand have been tragedy due to the dominance of schemes from life insurance companies.
“Both in New Zealand and internationally [long-term savings] has been dominated by life insurance companies… the techniques of obfuscation and confusion this industry has used to befuddle life insurance policyholders have been migrated across to the management of people’s savings… The net result is that savers have received lousy returns on their money… In my view this has contributed in no small way to the flight from financial markets to residential property as safe investment,” said Morgan.
Property in perspective If the perception of New Zealanders as poor savers is wrong, the view that w