Last month we wrote about what came through at the Portfolio Construction Forum.
Jonathan Pain’s argument that artificial intelligence will fundamentally change what human capability looks like. And Oliver Hartwich’s description of the slow unravelling of the institutional order that investors have relied on, often without realising it, for the past thirty years.
It felt different to the usual ‘this time is different’ commentary. We stand by that.
But we also said the right response is not alarm.
So this month we want to explain why. To do that, we need to walk you through something we rarely discuss in detail: the assumptions we use when we build your financial plan.
When we model your retirement, we run projections using real returns. That means returns after inflation, after fees, and after tax.
We do not use a single optimistic number and hope for the best. We run your plan across four scenarios: a real return of 1.0% per annum, 1.5%, 2.0%, and 2.5%.
These are not heroic assumptions. They are deliberately conservative.
To understand what those numbers mean in practice, it helps to work through the maths. The table below shows how a gross return gets reduced at each step, and why the picture looks different depending on whether you are still working or already retired.
| Accumulation phase (still working) | Retirement phase (drawing down) |
Gross return (before deductions) | 7.0% | 7.0% |
Less fees (approx.) | -1.0% | 1.0% |
Return after fees | 6.0% | 6.0% |
Less tax on investment income | - 1.7% (at 28% PIR) | - 1.1% (at 17.5% PIR) |
Return after fees and tax | ~4.3% | ~4.9% |
Less inflation (approx.) | - 2.5% | -2.5% |
Real return (purchasing power) | ~1.8% | ~2.4% |
Note: For both KiwiSaver PIE funds and managed portfolios, fees are deducted first, then tax is applied to the net investment return. Gross return assumption is approximate for a balanced fund. A growth fund typically targets gross returns of around 8.0% to 9.0% per year, which would produce a higher real return at each stage.
A few things are worth drawing out from those numbers.
When we plan to the 2.5% scenario, we are assuming gross returns toward the higher end of what a balanced fund would typically deliver over a long period.
When we plan to the 1.0% scenario, we are assuming something much more modest. Closer to what you might expect in a world where returns are compressed, geopolitics adds friction to global trade, and technology disruption creates winners and losers in ways that are difficult to predict in advance.
That is a world not entirely unlike the one Oliver and Jonathan were describing.
The shift in tax rate between accumulation and retirement also makes a meaningful difference.
The drop from 28% to 17.5% on investment income improves the net real return without any change in investment risk. This is one of the reasons we do not automatically recommend moving to more conservative investments when clients retire. The tax change alone does a lot of the work.
There is another factor that matters enormously for New Zealand clients, and is often underestimated when people compare their situation to those in other countries.
New Zealand Superannuation provides a guaranteed base income in retirement that is not means-tested and is linked to wages. For a couple, it currently sits at around 0,000 per year combined.
This means the amount of capital you need to accumulate is considerably lower than it would be if you were responsible for funding your entire retirement from savings. It also means the amount you need to take from your investment portfolio each year is smaller, which makes your plan less sensitive to a period of poor returns.
None of this makes the world Oliver Hartwich described less real.
Geopolitical friction, weakening institutions, and rapid technological disruption are genuine forces that will affect investment returns, inflation, and the policy environment over the coming decades. We are not dismissing any of that.
What we are saying is that your financial plan was not built on the assumption that everything goes well.
It was built to hold across a range of outcomes, including some fairly difficult ones. The conservative end of our scenario range reflects a world with meaningfully lower returns than the past three decades delivered. If the world Oliver described comes to pass, that is roughly where we might land.
Your plan is built to work there.
We do keep reviewing. The assumptions we use are not fixed forever. If the investment environment changes materially and persistently, we update our modelling and have a conversation with you about what it means for your specific situation.
That is part of what ongoing financial planning is for.
The other thing worth saying is that uncertainty is not new, even if the current sources of it feel unfamiliar.
Investors in the 1970s faced stagflation and energy shocks. Investors in 2000 faced a technology collapse. Investors in 2008 faced a financial system that very nearly did not hold.
In each case, the people who stayed invested in a diversified portfolio, kept their assumptions conservative, and did not make dramatic changes based on the mood of the moment came out reasonably well.
We think that lesson still applies, even in the environment Jonathan Pain and Oliver Hartwich were describing at this year’s forum.
If any of this prompts questions about your own plan and how it is structured, that is exactly the kind of conversation we are here to have.
