Mary Holm: Rewards are not just financial

Q. Every picture tells a story. Why did you use the "trashed flat" photo to illustrate the featured letter in your column last week? Can I suggest another image?

Picture a cheerful young man in his mid-20s walking up a suburban drive carrying a bottle of wine and a box of chocolates.

I have been a landlord for over 25 years both here and in the UK. I have had hundreds of tenants. I've wholeheartedly enjoyed the experience.

I have never had rent unpaid. I have never had to retain any bond. I have never had malicious damage caused.

I've enjoyed fixing up my properties as time allows at my own pace in the full knowledge that I am improving my investment.

Two weeks ago one of my tenants, "John", advised me he wished to move on and wanted to hand over the lease to a flatmate. That was fine and we quickly dealt to the paperwork.

Last weekend as I was fixing my car at home I looked up and saw John walking up the drive. He smiled and gave me a great bottle of shiraz and, to my children's delight, a box of chocolates. He said I'd been a great landlord and this was his way of saying thank you.

This charming encounter has been replayed in different ways a number of times during my years as a landlord.

A. Your wish is my command - hence the picture. What a lovely story. The only thing that doesn't ring true is your use of the name John. After being probably the most popular boys' name in my generation and my parents' generation - I and two of my closest childhood friends all had dads called John - there are hardly any 20-somethings called John.

But I digress. In answer to your question, we used the picture last week to illustrate what can go wrong with rental property - because many people don't seem to understand the downside. But, as you point out, investing in rentals can be rewarding, and not just financially.

It seems to me that some people are born landlords and some certainly are not. The couple of times I've had rental properties I didn't enjoy the feeling that I owned somebody else's home. There was a sort of uncomfortable power imbalance.

But clearly that's not an issue for you. Also, you're obviously good at picking tenants, and they appreciate you. And you are a happy handyman, which makes all the difference. Well done.

Q. A couple of questions regarding KiwiSaver. I am 64 years old and not employed.

First, I have joined in May and paid in enough to get the government tax credit due June 30, 2009, and the $1000 kick-start payment. Do I receive the tax credits for the next five years if I lump sum $1043 per year, or are they not available to me after I turn 65 this month?

Second, can I lump sum $1043 at any time from July 1, 2009, through June 30, 2010 - say, June 20, 2010 - and get the full $1043 government tax credit, or is it dependent on the number of days before June 30, 2010, that I make the lump sum payment?

A. It's great that you've jumped aboard the KiwiSaver bandwagon before turning 65. You'll get several thousand dollars from the government, and you have to wait only five years to get your hands on the money.

As someone who joined KiwiSaver over 60, you'll get the tax credit - which matches your contributions up to $1043 a year - until the fifth anniversary of your joining date.

And yes, after your first year in the scheme is over, you can "lump sum" - we seem to have come up with a new verb here - any time during the KiwiSaver year.

That may not be the best strategy, though. It's generally better to drip feed money in, so you end up making at least some contributions when prices are relatively cheap. Putting in $87 a month is good for that, or even $20 a week, if you can manage that. An easy way is to set up an automatic transfer out of your bank account.

Q. I enrolled my 17-year-old son, a non-earner, in KiwiSaver in September 2008. He turns 18 later this month. What proportion, if any, of the $1043 tax credit would he be eligible for if I top up his contributions to 10/12th of $1043 for the year to June 30, 2009?

A. First, let's explain a couple of things to other readers. The tax credit is not available to members under 18. For over 18s, the maximum credit in the first year of membership is proportionate to how much of the July-June KiwiSaver year they have been a member.

You are considering contributing 10/12ths of $1043, because your son has been in the scheme for 10 months of the KiwiSaver year. That would work fine if he had been over 18 all year. But because of his age, he won't be able to get a tax credit that big.

"KiwiSaver members who turn 18 during the member tax credit year (July 1 to June 30) are eligible for the tax credit for the portion of the year that they're 18," says Inland Revenue.

To get the maximum amount, multiply $1043 by "days"/365. "Days" refers to the number of days between your son's birthday and June 30. For example, if his birthday is June 20, his maximum tax credit is $1043 times 10/365, which comes to about $29.

It's peanuts, but you might as well contribute that amount before June 30 - and preferably now, to make sure there's time for it to be processed. The tax credit will double the contribution - which all helps. And from now on your son will get $1043 a year, provided he also contributes at least that much.

I asked Inland Revenue if you will have to notify anyone about the 18th birthday. Their reply: "After July 1 each year, providers apply for member tax credits on behalf of their members. Part of the application information includes the number of days in the year that the member met the tax credit age requirements.

"So all the member has to do is make sure they have contributed at least the maximum amount and they will get the credit once their provider applies for it."

Readers who want more info on tax credit timing in their first year in KiwiSaver can go to www.maryholm.com. Look under Incentives on the KiwiSaver Basics page.

Q. I have been a KiwiSaver member since nearly the start. I have tried to follow the market trends and last year moved my funds from a mix of conservative, growth and cash to cash only.

At the time this worked well as my provider's cash returns looked good at about 7 to 8 per cent. They have now dropped significantly, and it leaves me with a problem of what to do.

I am 58 years old, own a good-sized family home (with my wife) and have no major outgoings.

On current trends at my KiwiSaver provider it looks as if the return is now 3 to 4 per cent at best. I am reasonably happy at around this mark but would not like anything less and do not want to take any major risks.

Any advice will be happily received.

A. It's time, once again, for an old message: don't try to time markets.

It sounds as if you had a bit of beginner's luck with your move last year. That's great - as long as it doesn't make you think you really can predict trends, when in fact even the experts fail as often as they succeed. It's a fool's game.

I suggest you forget about where you think the markets are likely to go and consider two other issues:

* How long it will be before you expect to spend the money. If it's within 10 years, invest in a mainly bond fund, moving gradually to a cash fund within two or three years of your spending time. If your horizon is longer than 10 years, consider share and/or property funds, which are more volatile but likely to give higher long-term returns.

At 58, you might still have more than 10 years to play with. Just because the government's KiwiSaver tax credits and compulsory employer contributions will stop at 65, that doesn't mean you have to spend the money then. You could keep it accumulating returns until you are 80 or 90 if you wish.

* How well you tolerate ups and downs. Even if you have a decade or more up your sleeve, if you're likely to panic and switch out of a riskier fund after a market slump, you should probably go for a more conservative fund.

Once you've built up quite a few thousand dollars in KiwiSaver, it would be a real pity to ride the market down and get off at or near the bottom. Those who do well in share and property funds are those who stay on board regardless of the markets - until they get within about 10 years of their spending date.

In light of those two issues, decide how much risk you should take. Move to a fund with that level of risk and stay put. Not only will you do better over the long term but you'll have more time to enjoy reading novels or walking on the beach.

And don't worry if your fund returns are pretty low at times. Because of the KiwiSaver incentives, the returns on the money you put in will be considerably higher.

Let's say, for example, that so far you've put in a total of $5000, your employer has put in $3000 and the government has put in $2000, for a total of $10,000.

If your current return is 3 per cent, that's $300. But when we look at your $5000 of contributions, the return on that is 6 per cent. You couldn't have got a return like that elsewhere in a low-risk investment.

Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.