Q: In your last column, you suggest an older couple who downsized from Auckland to a smaller town could consider getting a cow for milk and cheese.
You're a financial expert, not an agricultural one. A third of an acre is not enough to support a cow, and owning one entails ongoing expenses — artificial insemination, hay, fencing, shelter, yards and possible vet fees, plus the animal is a daily tie to the property during milking season.
The couple are better to spend the $1000-plus cow money on their weekly bottle of milk and block of cheese. Their $350,000 plus $80,000 plus NZ Superannuation is sufficient to last them to the end of their days.
Selling excess vegetables at a farmers' market and ensuring an ongoing supply is a lot of hard work. I know: I sold vegetable and herb seedlings and a large range of perennials at weekend markets in the Bay of Plenty for 25 years.
The biggest problem, aside from the weather and very long hours, is competing with other sellers who don't declare their income to the IRD and undercut your prices to an unrealistic level.
A: You're pouring cold water all over my bucolic painting, and it's running everywhere. But you're absolutely right — my expertise doesn't lie in cows! Still, I also suggested chooks, which you haven't counted out.
Sad to hear how hard the farmers' market thing is, and that there's unfair competition. It can't have been totally terrible, though, or presumably you wouldn't have kept on doing it for all that time.
On whether the couple's savings are enough for them, that depends on their retirement spending plans. Read on.
PS: A friend comments: "For what it's worth, in my distant childhood I recall a woman who kept a cow on a quarter-acre section, but perhaps cows had simpler needs in those times."
Q: First, thank you for your extensive reply last week to my letter about moving out of Auckland.
My wife and sons would certainly agree with your "bleakest" comment — there's Dad going on a rave again!
I found all your points helpful and worth further thought and feel like I owe you a reply to all of them. So here goes:
• Cheap rental property. Had already ruled this out — too much worry.
• Vege garden and farmer's market. Yes, good — perhaps try to add some value to the produce.
• Cow might be a step too far for us.
• Solar energy and self-sufficiency. Worth investigating, but, as you say, could be a challenge. Have already done a little reading around these topics.
• Massey guidelines. Thanks for the link — extremely helpful — have already compared our expenses over the past 12 months against the scenarios. We are slightly more than "rural, no frills" expenses so should have no trouble getting back to this level. So much for my doctor's comment: "You need $1 million to retire".
• Transport. Bicycles, doable, as we are both in reasonable health. E-bikes a possibility if I get a technical understanding of how they work.
• Needing cash. Yes, I admit some of this will be required, and we definitely won't be storing it under the mattress.
• Collectibles or tradeables. Would not be tempted into artworks, but how about toilet paper, flour, pasta and cleaning products?
• Financial assets and bank strength. You are right, we are not interested in shares or bonds. We will continue with some term deposits with our bank, Kiwibank.
Some of our money we would put aside for education costs for acquiring practical skills, and for some comfort-based renovations to our "trade-down" property.
Once again, thanks for your advice.
A: A pleasure. Your letter was a good challenge.
Your doctor's comment is repeated quite often — that you need $1 million for retirement. Some of the people who make a living from retirement savings or advice encourage that thinking. I wonder why! It's discouraging and ridiculous.
In retirement, some people are content living off NZ Super only, and plenty are happy with that plus $100,000 or $200,000 or so. Of course, it helps to have a mortgage-free home, and depends on your lifestyle.
I'm glad you found the Massey retirement spending guidelines helpful. For readers who missed last week's link, go to tinyurl.com/RetSpending, and see Appendix 1.
On toilet paper, flour, pasta and cleaning products, I think you've missed your chance — although there never really was one!
Q: My daughter, who is 12, has special needs and receives a disability allowance from the Government every fortnight.
I was thinking of putting this into her KiwiSaver account. However, it is unlikely she will live to be 65. Is there any provision for special needs people to access their KiwiSaver earlier, or is it better for us to look into an alternative savings programme?
A: There's probably some good news for you and your girl — and not before time.
It has always seemed unfair that KiwiSaver doesn't work for people with short life expectancies. They've got enough else to contend with.
But now there are changes, assuming your daughter's condition is congenital — meaning that it has existed from birth.
"Recent changes to the KiwiSaver rules mean that KiwiSaver members with life-shortening congenital conditions will be able to access balances before the age of eligibility for New Zealand superannuation — currently 65," says Rachel Taylor, a partner in law firm DLA Piper who specialises in this area.
Some of these conditions will be listed in regulations, but they haven't yet been finalised, she says.
In the meantime — or if your daughter's condition is not included in the list — she will still be able to make withdrawals if she has medical evidence that her condition is expected to reduce her life expectancy below the usual withdrawal age.
Taylor adds that once your daughter starts withdrawing KiwiSaver money, she will no longer be eligible for Government contributions or compulsory employer contributions — although, of course, an employer could keep contributing. It will be as if she's retired at that stage.
So sign up your daughter. She won't get Government contributions until she's 18, but KiwiSaver is still a good place for long-term savings.
Next we need to see action for KiwiSaver members who have other life-shortening conditions that are not congenital.
This issue has come up in this column several times over the years. It's great to see progress, but let's finish it.
Q: I have just read your excellent book and have done research to change my KiwiSaver provider to get a better deal on fees. Given the times, is it wise to change providers now?
I am in a "moderate" fund and am not sure whether to transfer into a balanced or conservative fund with the new provider, again because of the times.
A: Any time is good to change to a provider with lower fees, regardless of what the markets are doing. Just ask the new provider to switch you.
Changing fund types is a bit trickier. Your moderate fund is probably the same type as the new balanced fund. Find out using "Check your current fund" in the KiwiSaver Fund Finder on sorted.org.nz. Transferring to a fund of the same type is fine.
But if you want to move to a lower-risk conservative fund, I suggest you start out with a third or a quarter of your money in that fund and the rest in the balanced fund. Then move the remainder, portion by portion, over a few months. That prevents you from transferring it all at what turns out to be a bad time.
The biggest borrower
Q: I have been reading a lot about the Government borrowing to help us all get through this pandemic.
Where does the Government borrow this money from, and how are the interest rates and payment terms determined?
A: Great questions.
The Government certainly is planning to borrow in a big way — about $60 billion. That's three times what it borrowed in 2011 after the global financial crisis — the previous largest amount in a single financial year.
The idea is to fund Government spending that will get the economy moving again.
Where does the money come from? Almost all of it comes from the Government issuing bonds, which are rather like bank term deposits. The investor lends the Government money and receives interest payments twice a year. At the end of the term, they get their money back.
Currently, bonds have maturity dates from 2021 to 2037, says Kim Martin, acting director capital markets at the Treasury.
The bonds are issued every Thursday, with eight institutions, mostly banks, bidding for them. Bidding starts at $1 million.
These institutions then sell the bonds in smaller parcels. Some are bought by KiwiSaver funds or other managed funds. Some are bought by insurance companies, pension funds and other huge investors. And some are bought by individuals, through banks, sharebrokers and the like.
About half the buyers are overseas, and half New Zealand institutions and individuals.
Government bonds are very low-risk investments, because the Government has never defaulted — failed to pay interest and pay back the principal.
As you would expect with such a safe investment, interest rates tend to be lower than on bank term deposits — which these days means pretty low.
How are the interest rates set? "When the Government bonds are issued, they have an associated 'coupon' rate," says Martin.
This rate is "based on prevailing market interest rates, at the time of the issuance. In turn, market interest rates are influenced by factors such as the level of the Reserve Bank's official cash rate and the level of bond rates in other countries," she says.
"Once the coupon has been set in this way, the bonds are issued and can then be 'traded' in the secondary market. The price at which these are then bought — that is, the price the investor is willing to pay for the bond with the associated coupon rate — determines the overall interest rate that they will receive over the life of the bond."
In other words, if you pay more for a bond than its issue price, the interest you receive will be a bit lower than the coupon rate. You've watered down the interest by spreading it over a larger initial investment. And if you pay less than the issue price, your interest will be a bit higher than the coupon rate.
You also asked about "payment terms". If you mean terms and conditions, these are set out in a product disclosure statement that you can read online.
If you mean how long the investment runs — "The maturities are set by the New Zealand Debt Management team at the Treasury to cater to investor demand and to allow a good spread of maturities, so they are not all 'due' at the same time," says Martin.
She adds, "New Zealand government bonds are highly rated by credit-rating agencies. They are among some of the top-rated sovereign bonds globally.
"This helps the Government to be able to borrow at lower interest rates than would otherwise be the case. Investors feel confident that the issuer is credit-worthy and they will get their money back when the bond matures."
- Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Holm'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 email@example.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Holm cannot answer all questions, correspond directly with readers, or give financial advice.