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The investment sidecar – why every KiwiSaver member needs one

The benefits of an investment sidecar, running alongside KiwiSaver, for a more secure and flexible financial outlook.

Tuesday, March 3rd 2020, 6:00AM 6 Comments

by Mint Asset Management

David Boyle

When I think of a sidecar I automatically picture a speedway motorcycle tearing around a racetrack with some poor soul hanging on for grim death attached to a pocket rocket. They are there to balance the rider and keep them on track so they don't career off into the crash barrier.

When I think about the investment world the analogies are not too dissimilar for your personal financial wellbeing especially when you decide to take a more active interest in your investments. A “sidecar” investment alongside your KiwiSaver account will provide you with more stability and help offset any bumps along life’s highway. More to the point you should be in a far better position financially as well. The key benefit is that you will have more flexibility but more on this later.

I first came across the “sidecar” idea when I was at the Commission for Financial Capability (CFFC). In 2018 at our Summit on financial capability I proposed the idea of developing a savings sidecar/emergency fund to be linked to investors’ KiwiSaver accounts.

The theory being before New Zealanders invested long-term, via KiwiSaver, they could use the central savings mechanism, via their employer and Inland Revenue, to have their contributions going into a rainy-day savings account.

This could be capped at a certain level, then all future contributions would go into their KiwiSaver fund. This would help mitigate the risk of using payday lenders and loan sharks to pay for life’s short-term emergencies like car repairs, redundancies and funerals for example. This would also help mitigate the growing number of hardship requests and the cost of delivery for that service which, ultimately, all KiwiSaver members pay for.

So it gave me much delight to see its inclusion in the CFFC’s recommendations as part of the 2019 Review of Retirement Income Policies.

The investment sidecar is just another extension to help achieve a better outcome in retirement after KiwiSaver. Let me explain. In most cases you maximise your benefits in KiwiSaver at 3%. This is because your employer is generally required to match your contribution at 3% and, if you are earning more than $35,000 a year, you will get the maximum government contribution of $521.46.

So, the question for some people is why would you want to add more to your KiwiSaver fund and have all those extra savings locked in to age 65?

The book Richest Man in Babylon, by George S Clason, suggests that paying yourself first is key and the rule of thumb is saving around 10% of your income. So if you were putting 3% into your KiwiSaver and your employer was doing the same this leaves you 4% to invest. This could go into a range of other options that allow you some flexibility, if needed, while also offering you some diversification from your current provider.

For example if you were 30 today, earning $50k a year, and had $20k in your KiwiSaver balanced fund, at the age of 65 you would have something like $413,000 in today’s dollars, going by the Sorted KiwiSaver calculator. If you added an additional $40 a week into your sidecar investment fund that earned a return of 5% net of fees you would have an additional $192,000 in today’s dollars, to improve your lifestyle in retirement going by the Sorted savings calculator.

The outcome of course would be very similar if you just popped those extra contributions in KiwiSaver but you would have less flexibility. The key one being your funds will be locked in until 65, unless you are buying your first home; have severe financial hardship; or end up in the very unfortunate position of not making it past the retirement winning post.

The benefits of saving outside KiwiSaver are:

  • Access to the funds if you really need them.
  • A broader range of investment choices, ie not just a range of diversified funds that are based on risk and return outcomes, but specific sectors like fixed interest; New Zealand shares; global shares; and property – directly or indirectly.
  • It allows you to diversify your manager risk. By that I mean you are not putting all your eggs in one provider’s basket.
  • It allows you access to different styles of manager. Some that are cheap and cheerful, like passive funds, or you might like to pick a manager who is more active and tries to beat their investment benchmark after fees.
  • You can also change your dollar contribution rate relative to your personal circumstances. Meaning you can manage your saving contributions not as a % of salary but the actual dollar amount you want to save.

All this is based on having extra savings available to pay for your sidecar. The outcome will fluctuate depending on how well you manage the race, how good your mechanic is (always good to get a little financial advice to make sure everything is running well) and of course the conditions you have to deal with to get to the finish line.

 

Disclaimer: David Boyle is Head of Sales and Marketing 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: www.mintasset.co.nz

Mint Asset Management is an independent investment management business based in Auckland, New Zealand MINT ASSET MANAGEMENT LIMITED IS THE ISSUER OF THE MINT ASSET MANAGEMENT FUNDS. DOWNLOAD A COPY OF THE PRODUCT DISCLOSURE STATEMENT AT: WWW.MINTASSET.CO.NZ

Tags: David Boyle investment investment manager Mint Asset Management

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Comments from our readers

On 3 March 2020 at 9:33 am Murray Weatherston said:
A couple of questions
1. What evidence is there that all Kiwis have a spare 4% in their budgets?
2. If they do but also have a mortgage, are they better off increasing the payments on their mortgage (with a guaranteed after tax return = their mortgage rate and arguably zero risk) or finding a sidecar and investing in it?
On 4 March 2020 at 10:19 am Michael Chamberlain said:
This is one of the many suggestions in the 2019 annual report that sounds good but does not stack up if there is scrutiny. The first question is where is the evidence that the current system is failing New Zealanders and failing sufficient that there is justification for government public policy intervention.

The concept of a “sidecar” already exists with many of the KiwiSaver providers having the vehicles and platforms to achieve it. The potential benefit, assuming that there is evidence of current market failure, is the convenience of the central contribution processing centre. However, this comes at a significant cost to taxpayers if it now has to also cope with sidecars and also to employers if they have to cope with changes to employees’ deduction levels. Given that a simple direct debit set up by a provider achieves the desired outcome with even more flexibility than is proposed by the Retirement Commissioner or in the article above, why should taxpayers and employers incur the cost.

The problem that the proposal is trying to solve is to give people access to cash in an emergency. If this was the case then the investment strategy would be cash investments as if it was in traditional financial investments that would deliver a net 5% after tax and fees as proposed it would be in shares and investors would now be cashing in the shares at a loss because they have financial difficulties because they have lost their job or have reduced overtime because of the virus. Anyone with a mortgage or debt would be better to pay off that debt than invest in a sidecar as that not only gives them a better return (allowing for risk) and increases their ability to borrow in a true emergency.

There is also the question of who benefits. Most people who might like extra cash to be available in an emergency probably can not afford to save extra. Those that can afford to save extra, probably should clear debt and then save based in current vehicles. It is hard to see the benefit to the NZ retirement policy framework of complicating KiwiSaver for non-retirement issues, particularly without evidence of existing public policy framework.

If we are really concerned about people having access to cash in an emergency then we should free up the KiwiSaver rules and let individuals take out their money when they wish, because they know their circumstances best, and not just when the government says they can. That would be economically more efficient. Better to let an individual solve their emergency when it arises and not have to wait until retirement.

As an aside, just incase someone thought that there was good information in the article, the maximum government subsidy is $521.46 and not $1,043 as the article says.
On 4 March 2020 at 10:38 am John Milner said:
Murray my preference and default advice is always to retire debt. However, there are clients that prefer to grow their wealth along side their debt. For me it’s clients with large lump sum funds but I can imagine some preferring to contribute regularly to their wealth along side of their KiwiSaver accounts where there is no reward for locking up funds beyond the 3%.
As I’m sure you well know, clients don’t always think or act in a rationale textbook manner. Therefore it is up us to ensure their journey is as safe as possible.
On 4 March 2020 at 12:14 pm Murray Weatherston said:
Dear Michael Your first paragraph is "old school".
My attitude changed recently when I realised that the old economic theory concerning whether to regulate or not, that asks first "what is the problem" has been abandoned.
What's replaced it is a new discipline called "policy analysis". This proceeds on the basis that the mandarins can invent a solution (often counselled by the people who will benefit from said solution), adopt it, and then go around looking for a problem to apply the solution to.
Having stumbled onto this new truth, I have stopped thinking about asking for cost benefit analyses (which is not the same as regulatory impact statements RIS) that measure the likely benefits against the actual costs so that society is better off.
In my observation RIS is nothing more than a tick box exercise that gives double ticks, ticks and crosses to things the regulators say they took into account when recommending policy - its nothing more than an ex post self assessment by the proponents.
That's why we get so many low grade Government initiatives, and why there is an incessant creep in Government expenditure. Henry Lang Roger Kerr et al must be turning in their graves. They and former old school Treasury officials still alive used to be strong line of defence asking "Why?" and saying "No" to anything that didn't have a real rate of return of 10% p.a.
Treasury seems to be either or both of soft and MIA.
On 4 March 2020 at 12:51 pm w k said:
@murray: fully agree.

kindly allow me to comment:

"the mandarins can invent a solution" - think it is call job creation.

"often counselled by the people who will benefit from said solution" - in other words, jumping onto the gravy train.

"RIS is nothing more than a tick box exercise that gives double ticks, ticks and crosses to things the regulators say they took into account when recommending policy" - aka no idea what is going on, hence, create problems for others.

the expert video clip posted earlier was 110% spot on.

i've said long before and say it again - the policies had been decided even before it went into the process of "consultation", getting "feedback & suggestions", etc. this so call "process" is merely going through the motion.


On 5 March 2020 at 1:04 pm b p said:
Sounds like David is really saying he wishes Mint had a KiwiSaver scheme to manage......

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