Q: I have found myself in a weird situation that isn't well covered by any book or blog.
• I have no debt besides a $200,000 mortgage at about 3 per cent.
• I have a low-fee KiwiSaver account with $50,000 in a growth fund.
• I have no partner or kids and an okay salary ($100,000).
I want to retire sooner than 65 — perhaps about 20 years earlier, in 12 years from now (I'm 33). All the "retire early" advice is geared towards US and Canadian people — but who's doing that in New Zealand? How to do it?
Do you know of many adepts of the Fire movement in New Zealand?
I plan to sell my house, close off the mortgage, shuttle that equity into index funds, and work and save until I hit $1 million. Then I'll retire, withdrawing 4 per cent annually, and go to live somewhere cheap until I hit $2.5m, at which point I would return to New Zealand and keep withdrawing 4 per cent.
I know you don't care, but it felt good to share :)
Thanks a lot for your help and if you have any comments or suggestions, please let me know!
A: Of course I care — although I'm certainly not as worried about you as some other recent correspondents.
You're in a strong position financially and I see no reason why you shouldn't go ahead with your plans. After all, if things don't work out as you hope, you can always go back to work.
To get other readers up with the play, "Fire" stands for "financial independence, retire early". It's an idea that has caught on with younger people in several countries.
You save really hard — watching every penny of spending — and invest your savings until you have a total of 25 times the amount you spend each year. You can then retire if you wish, and withdraw 4 per cent of your savings each year to live on.
In your case, you're planning to do it in two stages. You would spend $40,000 a year once you've saved $1m. And when you reach $2.5m you would spend $100,000 a year.
Sounds fine, but I have a few reservations:
• Will you get into the habit of being too frugal to enjoy life? You may have read in my last column about a wife who's having trouble spending on travel and other fun things in retirement because she's been so careful with money for many years. Old habits die hard.
• Could you end up being totally absorbed by money because you consider it all the time?
• Will you enjoy retiring young? I've heard of people who retired early and got bored. For many of us, working gives life more purpose. Just look at all the people working past age 65 when they don't have to financially.
• If you fall in love, hopefully it will be with someone who's happy to go along with your plans. Not everyone would enjoy keeping such a tight rein on their spending.
I don't want to be discouraging, but I do want you to go into this with your eyes open.
Another possible issue doesn't concern you. Some people note that it's harder to do Fire in this country because our housing costs are so high relative to incomes. But you're already in the housing market.
On people involved in Fire in New Zealand, there's a Facebook group called Kiwi Mustachians, which bills itself as a "place for Kiwis to further discuss Mustachianism. (see www.mrmoneymustache.com)". That website is partly about Fire.
Checking the record
Q: I've been following your columns for a while, all the way back to when KiwiSaver first started, and I joined up following your advice. I am now 36 and have my KiwiSaver in a growth fund, but the fees are about 1.3 per cent according to the Sorted website.
Simplicity has a growth fund that charges about 0.3 per cent only, so I did some research.
I couldn't find a financial strength rating for it, I guess because it isn't a bank. So I looked at the information on the website, and the CEO used to work for Hanover, Goldman Sachs and Tower.
People lost a lot of money from Hanover Finance; Goldman Sachs had to be bailed out during the global financial crisis; and Tower KiwiSaver no longer exists and was bought out by Fisher Funds. He has worked for failures and a scammer. Why should we trust Simplicity with the CEO's track record of failures? Am I missing something?
A: Good on you for doing that research. And you're right. Simplicity CEO Sam Stubbs' CV is, shall we say, colourful.
A Simplicity spokesperson responds to your letter: "All KiwiSaver providers, including Simplicity, are monitored and regulated by the FMA and are required to have a Supervisor for accountability purposes.
"Simplicity's Supervisor is the Government-owned Public Trust, which is the custodian of our members' KiwiSaver funds. We are not required to have a financial stability rating because we are not a bank.
"Sam was at Hanover for a brief stint and quit when it became apparent there were troubles there that preceded his involvement. While Goldman Sachs may not enjoy a good reputation today, it was, and still is, upheld by many as one of the prestigious investment banks in the world."
She continues, "In recognition of a rewarding career in the financial services sector, rather than retire at age 48, Sam decided to start a disruptive business aimed at driving down KiwiSaver fees so others could benefit from higher, long-term savings.
"Sam risked his own money to start Simplicity and built a nonprofit model that also gives 15 per cent of its investment fees to charity. The Simplicity Charitable Trust, which owns Simplicity NZ Ltd, has to date given away more than $750,000 to Kiwi charities. If this speaks to character, perhaps it will round out the story for your reader.
"I would also note that many of the financial entities that lost billions during the GFC [global financial crisis] enjoyed very good financial stability ratings, proving that a rating in itself is no guarantee of a secure investment."
Sam Stubbs adds more detail about Hanover: "I was hired by Hanover to list the company on the stock exchange and set up a funds management business. That's was when the financial markets were booming.
"Once the GFC began, it became apparent that Hanover could not list, or set up a funds management business, so I resigned after seven months in the job. I get the question from time to time, and it's a perfectly legitimate one."
Q: Late last year you published my letter about reducing silly spending on Christmas presents. Here's an update.
My partner was a bit unimpressed by my non-commercial presents of a meal out and 10 back massages. (He spent heaps on me — a $300 bread maker and $100 car stereo thing. Excessive!)
But in the holidays I took him for a flash lunch at Mt Difficulty vineyards restaurant as his meal, and a couple of days ago he got his first massage when he had a sore back — almost an hour. It made his back feel much better and he had a great sleep. So he's appreciating the presents more now!
He's actually asked me for another 10 massages for his birthday at the end of March. I'll have to hurry up to get all his Christmas ones done by then.
He also enjoyed calling me a grinch all Christmas after I showed him your article.
A: Maybe that could be the cheapest present of all — letting the recipient call you whatever they want to for all of Christmas Day!
Anyway, your partner sounds like a happy chappy.
Put benefits first
Q: I refer to the recent correspondence regarding beneficiaries being disadvantaged by KiwiSaver.
I am frustrated that others think the Government should pour even more money into KiwiSaver for beneficiaries, as it is obvious that benefit levels need to be addressed first.
Why should the Government direct more money to a small number of KiwiSaver fund managers charging fees in a locked-in fund, probably largely invested overseas? Isn't there a better solution?
Scrap KiwiSaver, apply the current Government contributions directly to improving the lot of beneficiaries, and continue to pay a Government-funded universal superannuation that is already recognised internationally as alleviating the risks of poverty in retirement.
A: I'm certainly not going to argue against increasing benefits.
The correspondence you're discussing was about a recommendation from the Commission for Financial Capability to "auto-enrol beneficiaries in KiwiSaver through a Government contribution". Beneficiaries wouldn't have to make any contribution of their own.
If that recommendation is adopted, some beneficiaries will surely say they would prefer more money in the hand now. Ideally, both would happen — beneficiaries would get a pay rise as well as a stake in their future.
It's true that if KiwiSaver — or at least Government contributions to it — were scrapped, that would free up money for both changes. But I don't like your chances of seeing such a vote-losing idea.
By the way, a good way to support a beneficiary under the current rules is to help them join KiwiSaver and then put $87 a month into their account so they receive the maximum Government contribution.
If necessary, you could even ask for all your $87s back when the person reaches 65. They would still come out well ahead.
Q: Letter from Kristen Lunman, general manager of Hatch:
In response to Smartshares' comments last weekend, every investment has risks. Sending the message that investing offshore is a minefield, and money is safer in a New Zealand fund, is a little paternalistic.
Wherever you choose to invest, it's important to do the research, understand who you are as an investor and the fees and risks of the investment you choose.
If you're considering investing overseas, Hatch's simple, transparent fees make it easy to compare the benefits of investing directly in the world's biggest ETFs (exchange-traded funds) against domestic options.
Tax is inevitable — domestically and globally. While a fund manager pays the tax on your behalf (at a lower rate if the fund is a PIE), there is still tax. However, the impact of tax is just one of the factors you need to weigh up when making investing decisions.
At Kiwi Wealth, you have a choice — managed funds or direct investment in US markets through our digital investing platform, Hatch.
We provide Kiwis access to resources to demystify investing and grow their knowledge (including a free 10-day getting started investing course), to help them make good decisions about their financial future.
A: Your letter starts to sound like a free ad towards the end! But given that Smartshares CEO Hugh Stevens had a good run last week — in response to a reader's concerns about the safety of Smartshares investments — it seems fair to let you have your say this week.
More on this topic next week.
- 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. 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 firstname.lastname@example.org. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.