Mary Holm

Mary Holm is a columnist for the New Zealand Herald.

Mary Holm: Future spending power hard to nail

4 comments
An investor promised a three-course meal will not be happy with a sandwich. Photo / Thinkstock
An investor promised a three-course meal will not be happy with a sandwich. Photo / Thinkstock

I recently saw a KiwiSaver advert. It gave retirement totals based on certain parameters - for example, income, per cent saved, etc - for various periods of time in the fund. These ranged from 15 years to 45 years, depending on your age when joining.

The end product after 45 years was about $1.8 million.

This is very misleading. With inflation at, say, 3 per cent and applying the Rule of 72, the buying power of your money would halve about twice in the 45-year period. What you end up with in buying power won't buy you very much - about $450,000 worth of pension.

If KiwiSaver is to become compulsory, folk must be better-informed and all misleading adverts removed.

Folk will otherwise still end up being a burden on the state.

A more useful advert would be: "To get 60 per cent of your salary at retirement time as a pension and a lump sum of x, you need to save at x per cent during your working life."

I quite agree with your main point. Telling someone they will have $1.8 million in retirement when it will buy only $450,000 worth is like inviting them to a three-course meal and then giving them a sandwich.

I'm not certain, though, that we should lay down the law about what should and shouldn't be in advertisements. Far better if New Zealanders can see through misleading claims - and perhaps boycott companies that make them.

To that effect, here's what I think an ad that projects investment growth should include:

* Totals in both nominal (before inflation adjustment) and inflation-adjusted figures.

* The expected annual return. Nobody can predict returns decades ahead, but if someone says you are likely to make more than 8 per cent if you invest in a high-growth fund or 6 per cent if you invest in a balanced fund, I would be wary. Using high returns makes a big difference over long periods. If Reasonable Provider assumes 8 per cent and Flash Harry Provider assumes 9 per cent for similar high-growth funds, Flash Harry will look much more attractive for no good reason.

* How fast the company assumes your income will grow over your lifetime. If Reasonable guesses 3 per cent a year and Flash Harry guesses 4 per cent, that too makes the comparison unfair.

Even if all this is done properly, though, projections over many years are rather meaningless. We have no idea, for instance, how much NZ Super someone will get in 20 years, let alone 45.

Nonetheless, people sometimes want at least a vague idea of how well-off they are likely to be in retirement. For KiwiSaver totals, I suggest using the Quick KiwiSaver calculator on the Retirement Commission's www.sorted.org.nz website. It's not trying to sell anything to anyone.

That website also has some retirement calculators on which you can make calculations like the one you suggest would be more useful.

For the benefit of others, the Rule of 72 enables off-the-top-of-the-head calculations. To work out how long it will take for inflation to halve the value of your money, divide 72 by the inflation rate. For example, if inflation is 3 per cent, the value will halve in 24 years.

Examples of other uses of the Rule of 72:

* If the value of your house has doubled in 12 years, how fast did it grow each year? Divide 72 by 12. It grew 6 per cent a year.

* If the annual return on an investment is 5 per cent, how long will it take to double? Divide 72 by 5. You can expect your money to double in about 14 years.

Note that the rule is a mathematical approximation. It works pretty well with percentages up to around 15 per cent. Beyond that it's a bit rough.One more quick point: you seem to assume KiwiSaver will become compulsory. I'm not so sure.

Great expectations

I trawled through the Weekend Herald and noticed an advert reading something like: "Visa charges increased, interest rates increased, bank charges increased - TSB 'Expect more'."

Perhaps not the most appropriate tag line in the circumstances!

This seems to be Bad or Mad Ad Week. Kevin Murphy, chief executive of TSB, responds: "I'm sure a few people might find 'expect less' inappropriate in some circumstances, too!

"Our 'expect more' tag line is of course a reflection of our customer service promise. And on that count, given we've been rated New Zealand's best bank for customer service for the last 10 years on end (in Roy Morgan and Nielsen polls), I think it's fair to say it's entirely appropriate."

Perhaps "expect better" would be more versatile. Then again, "expect more" has given Murphy a chance to get a free plug in this column, so who can say it's not a successful ad campaign?

Super for everyone

I have just turned 65 and have applied for NZ Super. My problem is that I feel very guilty about receiving it when I am still working, albeit in a part-time job that is not at all well-paid.

When I mention it to others, saying that I don't think it's right for people in my situation to receive NZ Super as of right, they invariably say that I've earned it as I've paid taxes for years and that it's owed to me. What is your opinion?

I don't think NZ Super is earned, as such. But I must say it's not an issue I have put much thought into, so I decided to go to someone who has - Michael Littlewood, co-director of the Retirement Policy and Research Centre at the University of Auckland.

Here's what he says: "I used to think that NZ Super should be income-tested because taxpayers, including the relatively less well-off, pay tax that is then passed to well-off older people who, on any reasonable measure, don't need it.

"However, I changed my mind, partly because of the example Australia gives us. The avoidance industry helps older Australians maximise their entitlements to the age pension by minimising their taxable incomes.

"I remember that an Australian financial planner told me some years ago that about 70 per cent of his fee income came from avoidance advice connected with the age pension entitlements."

What's more, while means-testing would reduce total NZ Super payments, to some extent that would be offset by government administration costs, including efforts to prevent avoidance.

Littlewood also says that poverty among the elderly is worse in Australia than in New Zealand. "In part, that's because of the complex Australian arrangements.

"A truly universal pension, like NZ Super, is much simpler and easier to build private saving plans on. Simplicity is a huge virtue in this area of public policy."

He continues: "Your reader should not feel guilty about receiving NZ Super. It's not about the taxes he or she has paid because, apart from anything else, the same NZ Super goes to citizens who have paid no tax. Rather, it's because he or she is a member of a community that treats its older citizens with dignity, humanity and fairness. NZ Super is a tangible recognition of those necessary components of a decent society."

Feeling better? I hope so, because you sound like a decent person - a cut above those who are just out to get what they can.

If you're still uncomfortable about accepting the money, you can always give it to charity. That way you channel government funds to where you would like to see them spent.

Missing pit

Sorry, but that photo with your column last week did not depict pit-sawing. No pit! With pit-sawing, the log is laid across or along the dug pit and the fellow underneath is inundated with sawdust! How did they get that huge log up on the frame?

It sounds as if I should be asking you that. Clearly, you're the expert!

Tax credit workings

In the first year in KiwiSaver the tax credit is received in proportion to how much of the year the person has been in it.

I am 67. My fifth anniversary from starting KiwiSaver is October 1, 2012, so after that I won't be eligible for the tax credit.

If I have my $1043 deposited by then, will I get the maximum tax credit? Or will it be just one quarter, because I will be in the scheme for just a quarter of the KiwiSaver July-June year? In that case, should I only deposit $260?

Close! You're correct in assuming that, in your last year of eligibility for the tax credit, it will be apportioned according to the period of the July 1 to June 30 year in which you are eligible.

As you obviously know - but other readers might not - the tax credit is now 50c for every dollar you contribute, with a maximum tax credit of $521.43.

So Inland Revenue calculates the tax credit for your last year as follows: "$521.43 x 93 days of membership (1 July to 1 October inclusive) divided by 365 days = $132.86 maximum entitlement. To secure the maximum entitlement, you will need to contribute $265.72 for the period."

Mind you, it wouldn't matter too much if you contributed $1043, as you could take it out again soon after.

Final payout

KiwiSaver withdrawal questions: I have been in KiwiSaver since it started. I turn 65 in May 2013. I hope to be still earning and contributing $1043-plus per year.

Will I get $521 in my final year, or a pro-rata amount?

Will I get that amount when I withdraw the funds just after my birthday, or will it be paid out after June 30? If so, will my KiwiSaver provider collect this and forward it, or will I have to apply direct to the IRD?

Unlike the previous correspondent, you must have joined KiwiSaver before you turned 60, so the minimum five-year membership for over 60s doesn't apply to you. Therefore, as you assume, your eligibility for the tax credit ends on your 65th birthday.

As stated above, yes, your final tax credit is pro-rata. That means that in 2013, your maximum tax credit will be around $460, depending on when in May your birthday is.

Once all your contributions up to your 65th birthday have been processed and passed on to your provider, the provider will make a claim to Inland Revenue for your tax credit.

Your provider can then either arrange for the payment to be made directly to you, or into your KiwiSaver account, for you to withdraw whenever you want to. I suggest you discuss the process with your provider closer to the time.

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 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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