Mary Holm

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm: Make hay on KiwiSaver largesse

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There's an important message here for everyone aged 60 to 64, whether you're working or not

There's a pot of gold at the end of the KiwiSaver rainbow. Photo / Simon Baker
There's a pot of gold at the end of the KiwiSaver rainbow. Photo / Simon Baker

I am in my mid-60s and have been made redundant after decades with the employer. I would like to take the opportunity to enjoy an early retirement, but will obviously need to cut back expenditure at least until I qualify for New Zealand Superannuation at 65.

I have a reasonable level of cash investment earning around 5 per cent before tax, and I'm also in KiwiSaver.

Am I better to draw on the invested funds to pay the minimum KiwiSaver contribution to receive the maximum tax credit, or should I take a contributions holiday? My KiwiSaver comes due when I am aged 66.

Hope you can find a wee corner for this one.

Not just a wee corner but the headline. There's an important message here for everyone 60 to 64: Make hay while the sun shines - even if there hasn't been a lot of shining going on in the past week.

Anyone in their early 60s is mad not to be in KiwiSaver, contributing enough to get all the incentives.

The main drawback of the scheme is that you tie up your money until NZ Super age or - if you join after 60 - until you have been in the scheme for five years. But for most people in their 60s, that shouldn't be a problem.

On the plus side, you receive the $1000 kick-start and tax credits of $1043 a year, plus employer contributions if you are employed. Those incentives continue until the age when you can withdraw money.

What does it all amount to? If you are not employed for the entire five years in KiwiSaver, and you contribute $1043 a year, you put in a total of $5215 and the government puts in $6215. If you invest conservatively, getting an average return after fees and tax of 3 per cent a year, you'll end up with about $12,300.

That's pretty amazing. If you saved the same amount outside KiwiSaver, you would need a return of more than 36 per cent a year to get to $12,300. Such a high return is close to impossible.

Employees do even better. If you earn $50,000 and contribute 2 per cent of pay, you would end up with about $17,200 - having contributed $5000. If you topped up your contributions to $1043 a year, you would get more still. And if you earn $100,000, you would end up with $28,300 - having contributed $10,000.

In all cases, if you invest in a riskier fund, you will probably end up with even more - although I don't recommend risky investment if you are planning to spend the money within 10 years.

Whatever way you look at it, the numbers are ridiculously good.

What about our correspondent? Having lost your job, you also lose your employer contributions. But the tax credits will still double your money and hugely boost your returns. So yes, you should definitely dip into your savings to make your KiwiSaver contributions. You will end up considerably better off.

To get the maximum tax credit, you need to contribute $1043 every July-June year. You may have already put that much in for the year ending this June 30 - looking at your own contributions, not employer contributions. If not, top up your contributions before June 30.

After July 1 this year, make sure you get $1043 in before June 30 next year - and so on. You can do $20 a week, $87 a month or any other pattern - including putting the lot in at once. Enjoy your early retirement. It's a great way of making something good out of something bad.

I'm quite disappointed by the attitude of the first letter in your column last week. "Suck it up" is not the answer.

My husband and I will be looking to purchase a home in two years, and we are not looking to spend $500,000, merely $300,000 including a deposit of $50,000. Then, as we know it will need work, we're assuming we'd have to put in approximately $25,000 to fix it, plus the lawyers fees, etc. Right now, we will easily be able to make the repayments of $450 per week (including rates, mortgage, insurance and maintenance).

The trouble is that we live in Auckland. I would like to hear your readers' opinions on how exactly we could get a house for $300,000 anywhere near any of the major business centres where people work? The extra petrol costs if we bought something affordable would be around $100 per week.

The affordability problem will force us out of Auckland.

Not only that, but when we wish to have children our mortgage and rates will be 50 per cent of our income. It is absolutely ridiculous to expect a family to be that far in debt. One bout of illness could be enough to put the family behind on the mortgage.

No matter which way you dice the numbers it's simply not affordable to own a home and have a family if you are starting out at the moment.

On your bikes, or at least your motor scooters. There are suburbs in West Auckland, for instance, where houses or units are cheaper, and you could cycle to work to save on petrol - or even take a bus or train. People all over the world happily do that.

There are other things I could quibble with. A $300,000 house won't necessarily need work. And you could save in advance to fund time off with babies, and work part-time when they are older. Also, if illness prevented your paying your mortgage, I'm sure the lender would give you a mortgage holiday for a while.

While there's no denying it's tough to get into the housing market these days, determined people find ways to solve problems. See the next two letters.

It is possible to buy a house in Auckland.

My husband and I bought a small three-bedroom unit in Auckland in 1977 for $26,500. We were on a combined income of approximately $10,000.

In order to do this, pay off a second mortgage of $5000 and then go overseas, we saved hard and worked another job on our days off. I took in sewing work for friends, and we had no new anything. Social life was at home or at others' homes, with minimal takeaways, concerts, etc. We finally had carpet after seven years when our first child started crawling.

My 26-year-old daughter, with her partner, bought a two-bedroom apartment in Albany three years ago for $270,000. They had a combined income around $100,000, and have now just come back from overseas. It's not such a different picture in some ways except they had new clothes, cellphones, stereos, new TVs - albeit second-hand furniture.

It's really about prioritising early and saving hard to get started in a small way as soon as you can, in the best area affordable, then moving upwards/outwards from that.

I suspect many readers will react as I did to the start of your letter: "That was the 1970s!" But as you point out, the price of your home was about 2.7 times your income - the same as for your daughter.

While house prices have generally risen more than wages since the 1970s, clearly there's still hope.

I see that one of your correspondents is bemoaning the unaffordability of buying a house in Auckland. We were in much the same situation in Wellington two years ago. Both of us were 24 and earning a combined income of $90,000. We looked at buying, but refused to pay $400,000-plus for run-down villas and horrible soul-less apartments, so looked further afield.

In the end, we bought a house in Porirua, just 20 minutes north of Wellington, in the low $200,000s, and we've since made a $20,000 paper gain.

We have put a plan in place to upgrade homes within five years. We will keep the starter property as a rental when we buy our second home, then sell off the rental when we buy our third home, and turn the second into a rental, and so on.

We figure this means we will always have one cashflow-positive property, which will cover one mortgage, should we go down to one income. And we have a savings account with six months' salary in it to cover the other mortgage.

We're on track at the moment to achieve the goal of buying our second home at the end of five years.

My advice to fellow Gen-Yers would be to swallow your pride and look past those manicured lawns and white picket fences. We have more disposable income now than we did while renting in Wellington.

Well done. Just watch out for the rules about tax deductibility of mortgage interest when you rent out a home you used to live in.

We went into this in the column a couple of years ago, so I won't repeat it now. Suffice to say you should get advice on it.

You asked for an historical comparison of affordability of property. In the mid-1970s it cost about $25,000 to $30,000 to build a 120sq m house, which was about five years' salary for a basic sales rep. Today that relativity is around the same. If anything it is cheaper to build now. So building costs have not gone up higher than wages.

The main reason for our high property prices is simply the shortage of available land for residential development.

In the 1970s there were vast subdivisions of residential land throughout Auckland, and section prices were affordable.

A common catchcry is that councils and/or government cannot afford to pay for infrastructure for such development, but my personal experience is that these costs are met by the developer, and cost ratepayers and taxpayers nothing.

Rezone lots more land for subdivision, and house prices will drop. The problem is that most people, particularly banks and homeowners, don't want property prices to drop, so I won't hold my breath.

Thanks for the info. It will be interesting to watch land price trends. What people want isn't always what they get, and in any case for many homeowners it doesn't matter what their house is worth, within reason.

Follow-up

Last week a reader put in a plug for Wanganui - or Whanganui - and added "we have a job for a good sales assistant if any Aucklander wants to apply".

I've forwarded two readers' emails about this. I'll let you know if we end up with a match - but don't tell the Herald job ad people!

Mary Holm is a part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter 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 (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

- NZ Herald

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