Mary Holm

Mary Holm is a columnist for the New Zealand Herald.

Mary Holm: How to save - and have a life

9 comments
'It's funny how the kids don't always stay financially independent.' Photo / Thinkstock
'It's funny how the kids don't always stay financially independent.' Photo / Thinkstock

Perhaps you can steer me in the right direction. I am 51, single, have my own mortgage-free home, and I'm debt-free. I have approximately $12,000 in KiwiSaver (currently only saving 2 per cent) and a small savings account ($20,000) invested in very short term while I decide what to do. My children are university students and therefore "on their way" to independence.

I have a reasonable income ($80,000) and do not know how to make the most of the next 14 years in my dash to retirement. I would like to now start "having a life" (have been a victim of leaky building for 6 years - now resolved). Shall I increase my KiwiSaver to the max (I think 8 per cent)? What shall I do with the $20,000? Do I "invest" in professional advice, or do I take my retail bank advice? So many humble choices (which is nice). Can you advise?

The only thing wrong with having choices is that you have to make them!

I've got several suggestions for you. Firstly, I would keep the $20,000 - or at least $12,000 to $15,000 of it - fairly accessible for emergencies.

You could perhaps "ladder" it in bank term deposits - a strategy that gives you quick access to your money, but also the higher interest usually offered on longer-term deposits.

An example: put quarter of the money into a three-month deposit, quarter in for four months, quarter in for five months and quarter in for six months. When the first deposit matures, reinvest it for four months, and then make the same four-month reinvestment with each maturing deposit.

Once you get this up and running, you'll have money maturing every month, but earning the four-month interest rate.

Secondly, I suggest you don't increase your KiwiSaver contributions. You're already getting the maximum employer contributions and tax credit. If you contribute more, you tie up that money, usually until you reach NZ Super age.

You never know when you might want money to set yourself up in business or upgrade your home. And it's funny how the kids don't always stay financially independent!

That's not to say, though, that you shouldn't increase your saving. It's a great idea.

If you like the way your KiwiSaver fund invests your money, ask if your provider offers a similar but accessible fund to which you can regularly contribute. If not, check other providers. Many offer funds like this.

Note, though, that managed funds don't always perform well, as our next correspondent points out. If you would prefer other types of investments - or if you want to discuss which types of funds are best for you - it's probably better to go to an authorised financial adviser rather than your bank, which will favour its own products.

Your use of the word "invest" in advice suggests you are willing to pay for it, and I applaud that. It's the only way to be sure an adviser is putting your interests first. For more on this, and a list of possible advisers, see the Info on Advisers page on www.maryholm.com

PS: About your comment about "having a life", how about taking, say, $5000 of your $20,000 and taking a trip or buying some other treat? You're in a pretty strong financial position, and it sounds as if you might be due for some fun.

Poor returns from funds

We have investments in two different managed funds - an aggressive one and conservative one - and for several years put in monthly contributions. However, we stopped putting more in when we realised how poorly they were performing.

To date, the average annual returns after tax and fees that we have earned (but not realised) are: aggressive 1.61 per cent a year after 13 years, and conservative 0.14 per cent a year after 6 years. This doesn't even cover inflation!

But the movements in the unit prices of our investments seem to mirror that of other such investments. So, unless another party is also putting in funds to supplement yours (for example, through KiwiSaver), why is there such a fondness for an investment type that does not appear to live up to the hype?

Or were we just unlucky in our investment timing so that for both funds, after we started investing, the unit prices went down first?

At the risk of insulting you, I wonder if you've calculated the returns correctly. It's not simple when you are contributing regularly. You need to allow for the fact that some of the money has been in for only a short time.

The easiest way is to use a regular savings calculator, but that works only if you make the same contributions throughout. Otherwise, you probably need a spreadsheet.

Assuming, though, that your numbers are correct, I agree that those returns are pathetic. And while six years is not really long enough to judge a managed fund's performance, 13 years should be.

But the past 13 years have been unusual. The markets have been really disappointing - with international shares, in particular, going through two extraordinary slumps. If you had stayed away from managed funds and instead invested directly you may not have done much better.

However, that's not all there is to it. Another issue is fees. In too many managed funds, the fees are pretty high, and really eat into low returns.

Before KiwiSaver, I said the big plus of managed funds was that they give you much better diversification than with direct investment. Also, the managers take care of dividends and other complications, making it all quite simple for investors.

Another advantage: fund managers can trade more cheaply than individuals, because they are trading much bigger volumes. But that can be cancelled out by fees - which is one reason I've always recommended index funds, which usually charge considerably lower fees.

KiwiSaver changes things, as you point out. Because of government and employer contributions, KiwiSaver funds are a much better deal.

But what should you do about a non-KiwiSaver managed fund investment? I suggest you check out the fees you are paying and see if you can pay lower fees in a similar fund elsewhere.

If your current fund doesn't make it easy to find out your total fees that in itself is a signal to switch to a provider that does.

You could, of course, just cash up and invest in bank term deposits. They might end up being a better bet over, say, the next 10 or 15 years. That would be surprising, though. While nobody can guarantee the markets will come right again, they have always recovered in the past, and it's hard to imagine that won't happen again.

Don't forget, too, that these days managed funds are taxed as PIEs. And the top PIE tax rate is 28 per cent, compared with 33 per cent on other income.

There are also tax breaks for those on lower incomes. They're a bit complicated to explain, but suffice to say that in some situations returns that would otherwise have been taxed at 30 per cent are taxed at 17.5 per cent, and so on. What's more, the tax is all taken care of by the fund managers.

A 'paltry' buffer

In July this year, my five years in KiwiSaver enabled me to uplift my funds of $28,500. I have absolutely no clues about investing as I have never had any money over from family expenditure to have ever invested in anything. I stopped work at the end of February this year. I turned 65 last October. Apart from a mortgage-free house, this is my husband's and my only "buffer" for our old age - probably at least 20 more years. I am over feeling insecure and scared of this. Life is to be enjoyed.

Should I leave it with the KiwiSaver provider with a proviso of being able to uplift money from time to time as of need? Or should I uplift it and invest through my bank, the BNZ? Remember my lack of financial literacy.

Yes, the bank personnel may be able to explain the reasons I should put the money with them and, yes, the financial manager can explain to me why it could stay with KiwiSaver, but in the end which do I choose to put my very treasured paltry life savings with?

You're in a different situation from the couple in the previous Q&A. They've had more investment experience, and are probably younger than you - so they are in a stronger position to take some risk.

In your case, I suggest you keep things simple and move the money into bank term deposits. But don't necessarily go with your bank. Check out the options on websites like www.interest.co.nz or www.depositrates.co.nz to see if another bank pays higher interest.

You then need to decide how to spend the money. It sounds as if you - like our first correspondent - are dying to be told to blow it on a world trip or something, and I'm going to half-pie oblige. Why not spend some on fun?

But given that you have no other savings, if I were you I would set aside at least some for, say, a new car every now and then, or house maintenance, or spending on health.

KiwiSaver access

We asked this question on infoKiwiSaver@ird.govt.nz: "My enquiry relates to accessing my KiwiSaver funds early due to permanently emigrating overseas. Will returning to New Zealand within the first year for any period of time affect being able to access the funds from the original date one leaves New Zealand? For example, if one returns to New Zealand for a month within the first year will that "restart" the one-year clock to access the KiwiSaver funds? Many thanks and kind regards." The response was: "As far as I am aware, this should not have any effect unless you take up paid work during the time you are back in New Zealand." Is it possible to get a definitive answer?

I can see why you're not satisfied with what the respondent was aware of. You don't want to find out too late that you've broken the rules.

Fortunately, when I asked Inland Revenue they came up with something clearer, as follows: "If a KiwiSaver member living overseas returns to New Zealand for a short term, for reasons such as family or a holiday and does not undertake paid work, then this will not affect their eligibility for accessing their funds."

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her opinions are personal and do not reflect the position of any organisation in which she holds office. Mary's 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.

- NZ Herald

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