Mary Holm on investing

Mary Holm is a personal finance writer

Mary Holm: Spend it now or spend it later?

23 comments
Sometimes our choice is 'now versus next week' and sometimes it's 'now versus several decades away'. Photo / Getty Images
Sometimes our choice is 'now versus next week' and sometimes it's 'now versus several decades away'. Photo / Getty Images

I was interested and surprised by your comment to a reader last week that she was in a "pretty strong" financial position as she had paid off her mortgage, was debt-free and had money in KiwiSaver and some savings at 51 years old.

My husband and I are also 51, have 2 years to be mortgage-free (we are putting 40 per cent of our after-tax income towards extra mortgage payments), have $30,000 in KiwiSaver and $50,000 in the bank and a good income. But I always worry that we are in a weak financial position and that we are starting our retirement savings a bit late compared with our peers. Our youngest is 8 years old.

Your comments?

Throughout our adult lives - whether we're conscious of it or not - we weigh up whether to spend money now or later. Sometimes it's "now versus next week" and sometimes it's "now versus several decades away".

Some people put too much emphasis on now, and end up struggling in retirement. Others err in the opposite direction, worrying too much about the future and depriving themselves in the present. That's the safe way, of course. And your children probably won't mind if you end up leaving lots to them. But is it the best way to live your life?

Let's look at how much you're likely to spend in retirement. As it happens, Dr Claire Matthews of Massey University released the results of a survey on this at a Workplace Savings NZ conference this week.

Matthews looked at "no frills" retirement spending, defined as a basic standard of living that includes few, if any, luxuries, and 'choices" spending, defined as a better standard of living that includes some luxuries or treats. She also broke down the results by metro (living in a big city) and provincial.

Here are the total weekly spends, excluding spending on rent, mortgage payments and rates:

* One-person no frills households: metro and provincial both $113.

* One-person households with choices: metro $350, provincial $351.

* Two-person no frills households: metro $241, provincial $244.

* Two-person households with choices: metro $762, provincial $694.

With annual spending ranging from less than $6000 to less than $40,000, I suspect these totals are lower than many people expect. For more details on the research, see yesterday's Herald.

By comparison, NZ Super payments for single people living alone are $349 after tax a week for people in the lowest tax bracket, ranging down to $268 for people in the highest bracket.

For a couple who both qualify for NZ Super, they range from $537 after tax for those in the lowest bracket to $405 for those in the highest bracket.

The implications are:

* Many no frills households - who get considerably more in NZ Super than they spend on everything other than housing - are still paying rent or mortgage payments in their retirement.

* Many of the households "with choices" receive a lot less NZ Super than they spend. Obviously they supplement their Super with income from savings.

So how many retired people live only, or largely, on NZ Super?

The latest info comes from the Ministry of Social Development's 2011 report on Household Incomes in New Zealand, which is based on the 2009-2010 Household Economic Survey. But I doubt if there have been big changes since then.

The report says that, "The great majority of older New Zealanders (aged 66-plus) are very dependent on NZ Super and other government transfers for their income."

More specifically, 40 per cent have virtually no other income source. And the next 20 per cent get, on average, 80 per cent of their income from NZ Super and other government transfers.

Only about a third of people over 65 "receive more than half their income from sources other than NZ Super or the Veterans Pension".

In other words, anyone who goes into retirement with considerable savings is in the minority. And it sounds as if you will surely be in that group. You already manage to save while putting 40 per cent of your after-tax income towards your mortgage. So once you've paid the mortgage off, you'll be able to save at a really healthy pace.

Will you save enough? It depends on how well off you want to be in retirement. If you want high luxury, you should be saving more. But if you're happy with somewhat less - but still way more than most retired people - I would say that you, too, are pretty strong financially.

Watching KiwiSaver

With reference to the Q&A about "Poor returns from funds" in your last column, my guess is that over the long term - 15 to 30-plus years - numerous KiwiSaver funds could produce similar poor returns. Some funds will give very poor returns. Some people may even get back less than they put in.

Hence the Kiwis' love affair with bricks and mortar - generally residential property I guess.

Yes, KiwiSaver is a good idea for most people, but it needs better regulation and strict controls both by the individuals, companies and government. Otherwise in years to come there will be numerous failures and poor returns. There are no guarantees - for example, the 1987 sharemarket collapse and the great global financial crisis since August 2007, and it continues.

I wrote to you some years back (2005?), just before the overheated finance companies started to collapse, and a year or so later many of them collapsed and still are.

I very much doubt things have changed in human nature. There are numerous ways to skin a cat. One way is to make the instruments so complicated that the average guy can't follow them - a bit like the American derivatives markets, sub prime mortgage markets, toxic assets, Ponzi schemes, etc.

Sorry to be a bit of a scaremonger - but people need to be aware and watching all the time.

Let's take your points one at a time. I agree that some KiwiSaver funds will produce poor returns. But I would be really surprised if anyone over the long term ends up taking out less than they put in.

The most likely candidates for such a dismal result are non-employees, who don't get employer contributions.

These days non-employees get 50c from the Government for every dollar they contribute - up to a maximum tax credit of $521. What's more, those who joined in the early days got $1 for $1 for the first few years. And everyone's account is also boosted by the $1000 kick-start.

Sure, in a serious market downturn a non-employee's account could lose more than the total Government contributions. But over longer periods - during which markets always recover - that seems highly unlikely.

On regulation of KiwiSaver, the Government is working at improving that on several counts - keeping a closer eye on management, and requiring better reporting that will help members understand what's going on.

I agree with you that it's wise to be wary of complex investments. If you don't know how returns are being generated, stay away. But the vast majority of KiwiSaver funds are not complex.

In conclusion, while there will indeed be some problems with KiwiSaver funds over the years - that's inevitable with investments - I'm confident they are not the next finance companies.

Student loan choices

I would like to ask you a question in regards to my son's student loan. His loan is about $27,000. As soon as he finished his studies we gave him that money, and I advised him to invest it in term deposits rather than pay off an interest-free loan.

He has now lived in London for the past five years and of course had to pay interest on his student loan living overseas. He thinks that he will be returning to New Zealand in the next two years. His student loan is growing at present as the interest on the investment is not covering the loan, but it's only by about $800 a year.

I still believe it's better not to pay the loan off, as when he is back in New Zealand his student loan will be interest-free again (as it stands now), and he will be much better off in the long run by having his money invested and just paying off what he has to.

The other option would be to get the 10 per cent discount and pay it all off.

What would your advice be? Your thoughts would be much appreciated.

Let's start by making an assumption - that your son does return to New Zealand in the next two years.

If he keeps the loan, once he's got a job here he will have to make compulsory repayments. At the moment, those repayments are 10 per cent of income above a threshold, currently $19,084, but the rate is scheduled to rise to 12 per cent in April 2013.

However, he will still have the money you gave him sitting in term deposits earning interest. Will that more than offset the current annual debt growth of $800?

We can't be sure, because we don't know:

* How much interest the term deposits will earn in future.

* How much your son will earn here - which will affect how fast his balance diminishes through compulsory repayments.

* Whether the Government will change the rules.

And remember that a dollar now is worth more than a dollar in the future, because you can earn interest on it in the meantime. If your son is going backwards now for a gain later, he should take that into account.

Weighing it all up, your son may end up benefiting by keeping the loan rather than repaying it. But we can only say "may" benefit.

And there are two other issues to consider:

* The Government has recently announced that the 10 per cent voluntary repayment bonus will be removed on April 1, 2013.

* It's quite possible that your son will postpone his return to New Zealand. It happens to the best of us. We get a great job, or fall in love with a local person or a local pub.

The longer your son might stay offshore - running up interest on his loan - the more it tips the balance towards repaying the loan, and doing it soon while the repayment bonus is still running.

Time for some hard questions. Alternatively, you could toss a coin. Or just repay the loan and stop worrying about it. The difference between the two options probably won't amount to much in the greater scheme of things.

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 bestselling 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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