KiwiSaver Q&A: Should I take a KiwiSaver holiday to fast-track the mortgage or keep plugging away?
By Amanda Morrall
Q)I am in a company KiwiSaver super scheme where the company matches my contributions up to 7.5% of my salary. Hence, I contribute 7.5% each fortnight amounting to about $1,000. My money is in what I perceive to be an under-performing aggressive portfolio. I have recently taken on a $385,000 revolving credit mortgage at 5.4%. My question is would I be better off taking a KiwiSaver contributions holiday and putting that $1,000 towards the mortgage for 4-5 years.
A)You're not alone in thinking you might be better off getting the mortgage monkey off your back before you pursue other investments more seriously. While that strategy can be effective, many would argue that retirement savings deserves a front-seat in your financial plan as well.
The argument for keeping up those KiwiSaver contributions, alongside mortgage repayment, is particularly strong in your case because of the generous top-up you are receiving from your employer.
In any event, I took your question to an authorised financial adviser so you could have the benefit of an expert opinion on this one.
But first, for the benefit or other readers, lets review your circumstances: You're a 48-year-old employee in KiwiSaver. You are invested in an aggressive fund with AMP. You're making personal contributions of 7.5% of your pay on annual basis and your employer is matching you. You have a revolving credit mortgage of $365,000 with an interest rate of 5.4%.
Nigel Tate, with Nigel Tate Financial Planning Ltd in Hamilton, broke your question into two parts: 1) whether you'd be better off taking a KiwiSaver holiday and channeling that money onto the mortgage and 2) whether you are invested in the right fund.
Let's look at the first one.
You'll be well aware that most employers contribute only 2% of gross pay to KiwiSaver, so the 7.5% you are receiving from your employer is exceptional. Sacrificing those bonus investment dollars for the sake of your mortgage doesn't make sense, the way Tate sees it.
Even with employer's contributions getting taxed next year, you're still getting a huge amount of money that you presumably would not be getting if you took a KiwiSaver holiday. The other point Tate makes on the mortgage diversion option, is that you'd be increasing your risk exposure to an illiquid asset.
"Contributions to KiwiSaver with employer support at the level gained in this situation, is extremely beneficial and it is likely to be imprudent to simply focus on debt reduction at the expense of the $26,000 contributed by his employer. By diverting his contributions to his mortgage would in fact increase his overall risk exposure to illiquid assets (his property).''
He makes a good point however I would point out that many people also see KiwiSaver as an illiquid investment as well, on the ground that you can't touch it until you're 65. Okay, so technically speaking that money is more fluid because it's in equities but you get my drift. It's hands off until you throw in your hat at work in 17 years time or so.
With respect to whether you are in the right KiwiSaver fund, Tate suggests it is not so much which fund you are in that matters but the fact that you're in one at all.
"It is imperative that clients needs are met with any KiwiSaver plan and whilst at present the fact that you contribute is of far greater importance than which fund your are in as the amounts at this stage are reasonably low. The fund would need to be losing 50% per annum for the client to be losing any of his contribution in effect."
That may be cold comfort in the face of unimpressive returns on your KiwiSaver.
Tate suggests you're probably an ideal candidate for a financial adviser, given your earning ability and income, and your proximity to retirement age. Now is the time to review your circumstances in earnest and get organised for retirement.
Part of that exercise would entail a review of your risk profile and your cash flow requirements now and going forward.
Tate suggests this would allow you set your priorities and risk tolerances to suit your needs.
It could also be you are more loss averse than risk averse, which is important to determine, he argues.
For your money, a financial adviser will give you guidance on this but how about pushing your provider for some answers too. Under the new regulatory environment in New Zealand, KiwiSaver salesmen and saleswomen are expected to be authorised financial advisers (AFA). That means they have the same qualifications as financial advisers giving personalised investment advice, or that's my read of the situation.
How about getting on the horn and asking to speak with an AFA employed by your provider. They should be able to put you through a risk profile questionnaire to determine whether you properly belong in an aggressive fund. They should also be able to explain, or at least rationalise, what's going on with the fund and why it's not doing so hot.
Sure, they may give a big sigh or huff about being put to work on this, but remember you are paying these guys to manage your money so why not hold them to account for it?
Going back to your original question, Tate concludes that you're long-term better off maintaining your KiwiSaver contributions and if you have any spare income left-over after that, throw that onto the mortgage as well.