Finding the cosiest place for a nest egg

NEST EGG: Life-cycle investment schemes are fine if you fit the average profile, but they may not be for everyone.
NEST EGG: Life-cycle investment schemes are fine if you fit the average profile, but they may not be for everyone.

Let's be honest - planning for your retirement and conducting the research needed to make informed decisions can be an arduous task for most of us, and one that fits under those "boring, must do" tags.

It's also a task that you need to keep on doing as you age to ensure your savings are being piled in an asset class appropriate to your risk profile.

For many people it's a hassle they would like someone else to take care of for them and increasingly life-cycle KiwiSaver investment schemes are proving popular for just that reason.

So what are life-cycle schemes?

They automatically migrate your KiwiSaver funds into various assets as you age. So, as a 20-year-old joining the workforce you would be completely invested in higher yielding but riskier assets such as stocks, because you have a long enough timeframe until retirement to recover from any short- term volatility. Then, as you get older, your KiwiSaver provider would automatically shift you into different, less risky, asset classes.

So if you're 35, that might be 70 per cent invested in stocks and the remainder in bonds, whereas if you have only one year left to retirement, you would be almost completely invested in cash and fixed interest.

The advantage of this approach is that investors can adopt a set-and-forget approach to their retirement savings and still end up with the bigger nest egg than if they had remained in the same fund over that time frame.

Research by retail bank ANZ showed that someone who started saving at 25 and earned $36,000 a year, would have a nest egg of $320,000 by the time they reached 65 if invested in one of these schemes. That's $72,000 more than if they had been in a conservative fund for 40 years.

Those who don't choose what type of KiwiSaver account they want are now put into one of the six default KiwiSaver options.

The Government recently launched a discussion paper looking at whether the default KiwiSaver option should be switched to a life-cycle approach as is the case in Australia, Britain and Sweden among others.

But just because you can outsource your retirement savings, does that mean you should?

"On balance the idea or proposition behind these products may make sense,"Westpac's head of investment solutions Matthew Goldsack said.

But he warned there were also hidden dangers those investing needed to be aware of. That's because despite being thought of as a one-size-fits-all product, life-cycle KiwiSaver schemes don't always suit every investor.

For example, not everyone who is in KiwiSaver is saving for retirement.

Many young people may be looking to tap their KiwiSaver accounts to put down a deposit on a house.

Official figures show that between July 2010 and September 2012, almost 10,000 savers used the first home withdrawal option, and many of them were under 35.

Nigel Tate, Westpac's head of wealth products, said that under a life-cycle scheme these people would have their funds invested in higher risk stocks, which could expose their deposit funds to short-term vulnerability that could impact the purchase of a house.

He said they should instead be invested in a conservative or cash scheme until the purchase was made, and then shift back into stocks - something the current life-cycle products did not cater for.

Another scenario would be if you were facing financial hardship and wanted to protect your nest egg. That's something set-and-forget products would not recognise.

That's because life-cycle products are based on a profile of the average person and their retirement needs.

So when you hit 50, half your portfolio might be in bonds even though personally you have a higher risk appetite than the average 50-year-old because you may be planning to work until you are 70.

"It's a bit like pret-a-porter in fashion - everything is fine if you've got a 40-inch chest and you're six foot tall," said Murray Weatherstone, a financial adviser at Financial Focus. "But if you've got a 40-inch chest and you're five foot two, then there's a problem."

Some advisers feel strongly life-cycle products aren't an answer for everyone.

Alan Borthwick, of Dux Financial Services, advised that some people may be lulled into thinking that a life-cycle fund is a replacement for quality advice that looks at an individual's total wealth picture, not just their retirement savings.

"The key issue is they are a substitute for advice that isn't advice," he said. "It's an attempt by some banks and non- registered financial advisers to give advice that this is how everyone should save."

Borthwick believes there is a place for life-cycle funds in the market, but it is far narrower than people think or providers suggest.

Ultimately the consensus seems to be that the KiwiSaver landscape is richer for the introduction of these funds, but as with all personal finance matters it comes down to finding the product that best suits your individual needs.

"My fundamental belief with KiwiSaver is it's better putting money aside rather than not," Borthwick said.