Liz Koh: Nest-eggs need to be nurtured

By Liz Koh

What to do first

Reaching retirement age with a debt-free home and a pile of money invested is the aim of most people who plan to enjoy a comfortable retirement. Each of these goals requires a significant amount of saving.

The big question is: which should take priority?

Having a long investment time frame can be advantageous when investing in volatile growth assets such as shares and property. Saving for your retirement from a young age is, therefore, a good idea.

However, if you have a mortgage, your investment portfolio would need to produce a tax paid return higher than the rate of interest on your mortgage to make investing a better deal than debt reduction. From a strictly financial point of view then, it can make sense to pay off your mortgage as quickly as possible, then save for retirement. There are three main exceptions to this.

Joining KiwiSaver is likely to give you a better financial return than paying off your mortgage quicker. That's because once you are a member you may be eligible for employer contributions and/or tax credits as well as receiving investment returns.

You may be one of those people who prefer to spend rather than to save, so putting a little aside each payday into an investment portfolio will help you develop a savings habit and feel as though you are getting ahead.

The interest on your mortgage may be tax deductible if the borrowing was done for investment purposes (eg. property investment or business). In that case, the expected tax paid returns from investments may be higher than the net interest cost after tax.

Ultimately, getting rid of all debt is good, even if the interest is tax deductible, and the sooner the better. It is just a question of priority.

Liz Koh is an authorised financial adviser. The advice given here is general and doesn't constitute specific advice to any person. A free disclosure statement can be obtained by calling 0800 273 847.

- Hamilton News

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