Life stages research shows big differences in outcomes

Lifestages funds are a better option for savers than default KiwiSaver funds, but they’re not all created equal, new research from MyFiduciary suggests.

The research was commissioned by NZ Funds and reviewed the lifestages options available in New Zealand.

Nine out of 22 KiwiSaver managers offer a lifestages option. These reduce the level of risk an investor is exposed to over time.

David Rae, an investment consultant and principal at MyFiduciary said the research found that the average fund was too conservative overall and started de-risking too early.

There are two main approaches to lifestages investment – one makes small regular changes to asset allocation while the other undertakes less frequent but bigger steps. AMP, ANZ, Generate and Lifestages opt for the latter.

Bigger steps could be a problem if rebalancing coincided with a bad time for the equity market. Rae said a smoother approach was much better.

But he said in general any lifestages approach was better than a single setting for an investor’s overall outcome.

“The right investment allocation for a 25 year old is very different o a 65 year old … you’ve either got to be pretty active through your investing life to make sure you are getting the right setting … or you do it automatically through a lifestages approach.”

The Government has proposed requiring default KiwiSaver funds to take a lifestages approach.

Rae said this would be an improvement.

People were more likely to choose a lifestages option than to opt for a high-risk investment fund if presented with a menu of options, he said, and default funds would never be set at the 80% growth allocation that would best suit many young investors.

But they could be delivered those results through a lifestages fund.

Early de-risking remained a problem, though.

The research showed that ANZ had people in zero growth assets at 65, despite potentially having another 30 years to live.

Some started to dial down risk when investors were in their 40s, Rae said.

“In terms of total accumulation of wealth through the life cycle that’s early in dollar terms.”

MyFiduciary modelled a person who starts saving at age 25, has an income of $75,000 that grows through time, and saves 4% of their income (plus a 3% employer contribution).

The average of all balances at 65 was $426,000.

Savers who chose NZ Funds, Fisher Funds or SuperLife achieved a higher level of expected wealth at retirement after fees.