Mortgage-free, debt-free and children have left the house. I'm now embarking on a career change of my own. Photo / 123RF
OPINION
Q: I have just turned 50 and have raised my children as a solo parent while working full-time. They have now left home to make their own way in the world and, after much sacrifice, I am mortgage-free and debt-free.
I’m about to embark on a career change of my choosing, which means a drop in income (although still working full-time) and four years of study - all of which is ok with me.
Occasionally I help out my children with the odd financial curve ball, and I have a minor medical condition which requires access to my savings to cover the cost of bi-annual medical checks. I intend to use $30,000 over the next four years to assist with finances while changing careers (which is ultimately not going to pay a huge salary but is in a secure industry, offers options for when I get older including employment post-retirement age, and something I enjoy).
The question is - I’m not sure how to make my remaining $140,000 in savings grow. Being a solo parent has made me cautious with spending and I am concerned that I’m not making the most of the money sitting in the bank. I am enrolled in KiwiSaver.
A: Good on you – first, for getting rid of your mortgage and debt and saving a considerable amount in difficult circumstances and, second, for making the career move.
Many people would shy away from accepting a cut in income and taking on four years of study at your stage in life. But you’ve thought it all through, including checking job prospects into your later years. And – most importantly – you will be doing something you love.
It sounds as if you’ve budgeted for getting by without using the $140,000. But it would be wise to keep a portion of that within easy reach in case you unexpectedly need it to replace a car or appliance or for house maintenance and so on. The last thing you need while working full-time and studying is money worries.
Where should you put that money? At the moment, bank term deposit (TD) rates are a fair bit higher than savings accounts, and TDs for six months are considerably higher than for one month. To make the most of that, but still have $10,000 available every month, you could “ladder” say $60,000.
To set this up, put $10,000 into a one-month TD, $10,000 into a two-month TD and so on, with the last $10,000 in a six-month TD.
When the first one matures, reinvest it for six months – so it will be available to spend again seven months from now.
When the second one matures, also reinvest it for six months – so it will be available again eight months from now.
From then on, reinvest every maturing TD for six months. You will always have $10,000 plus interest (after tax) maturing every month – plus another $10,000 a month later, and so on.
If you have to use any of this money, rather than reinvest it, top it up with the rest of your savings.
Meanwhile, what should you do with the remaining $80,000? If you want to be certain your balance won’t fall, put it in bank TDs too. You could ladder the whole lot as described above, or ladder the $80,000 over, say, one to five years to get the still-higher interest rates over longer terms – although the money wouldn’t be as readily available.
Another option is a non-KiwiSaver fund. If you’re happy with your KiwiSaver provider and they charge low fees, you could use one of their funds.
Nobody knows whether you will get a higher return in a fund than in TDs. If you choose a higher-risk growth fund or middle-risk balanced fund, your returns will probably beat TDs on average over the years, although almost certainly not every year. If you wouldn’t cope easily with volatile returns, go for a low-risk defensive fund, or a slightly riskier conservative fund – in which case you may or may not beat TD returns.
In all these funds the money takes just a few days to withdraw. But you have some ups and downs. Weigh this up against the certainty of returns on TDs, but less accessibility. Your call.
Footnotes:
Q: I sold my Auckland home eight years ago to move in with my partner in another district. I bought an investment property nearby in 2019.
My partner just passed away, and I want to move back to my family in Auckland, but I believe I can’t sell my investment property until the five years is up.
I’m not happy being on my own in my partner’s home and want to relocate but fear my funds are locked into this investment property. Any advice on exemptions to the bright-line timeframe in a situation like this would be appreciated.
A: Your money isn’t locked in. The bright-line rule doesn’t prevent you from selling. But if you sell at a profit, that profit will be added to your other income and taxed at your rate.
While I think it’s fair for investors in property, shares or anything else to pay tax on their capital gains, let’s not go there again in this column at this stage. The last time we looked at that topic, the Q&As went on for months!
Suffice to say that – regardless of my view - I can understand your desire to avoid the tax.
I’m afraid there are no exemptions to the bright-line rules for people in your circumstances. That’s probably because some people would be sure to tell a lot of fibs to qualify if there were.
However, as you may have heard, the new coalition Government is expected to change the bright-line rules, so they apply only to rental properties sold within two years of purchase. The change seems likely to take effect next July.
In any case, because you bought your property between March 2018 and March 2021, the bright-line rules stop applying after you’ve owned the place for five years. And given that you bought in 2019, that five years will be up in 2024. So one way or the other, sometime next year you will be bright-line-free!
Still, understandably you don’t want to stay in your current situation for longer than necessary. The simple solution is to move to Auckland and rent in the meantime. The bonus: it will give you plenty of time to look around the Auckland market to see what sort of place you would like to buy.
Q: Our son now lives permanently in the UK and is looking at buying his first home with his English partner next year. Is he able to use his KiwiSaver here in New Zealand for his first home, even though he is purchasing it in the UK?
As he has no intention to return to New Zealand at this stage, it would be nice to have access to some of the money sitting in his KiwiSaver before he turns 65 in over 30 years’ time.
A: Good news – for the most part! Your son is not allowed to withdraw KiwiSaver money to buy a first home outside New Zealand. But as long as he has been living overseas somewhere other than Australia for at least a year, he can say he has permanently emigrated, close his KiwiSaver account and use the money for a first home - or an extraordinarily expensive party or anything else.
I say it’s good “for the most part” as your son will have to kiss goodbye to government contributions he has received over the years. That money goes back to the government, says an Inland Revenue spokesperson.
But he gets to keep his own contributions, employer contributions, and the returns he’s earned on the money – including returns on the government contributions. If he received the $1000 kickstart and fee subsidies in the early days of KiwiSaver, he can keep those too.
For the benefit of others, if you move to Australia you can’t close your KiwiSaver account and access the money to spend, but you can transfer your KiwiSaver money to a superannuation account over there.
Q: A young person goes to work in the UK for five years. They want to start paying into a private pension and have an opportunity to do this in the UK - 5 per cent plus 3 per cent employer’s contribution.
Is it better to do this or send money to New Zealand and pay into their KiwiSaver?
A: Go with the UK pension, because of the employer contributions.
Anyone living overseas – including in Australia - can keep contributing to their KiwiSaver account. But they’re not eligible for government contributions and won’t get any employer contributions.
Unless fees are much lower in their KiwiSaver account, and for some reason, their fund earns much higher returns than their UK pension fund, the account that gets a subsidy will always be better.
Q: I hope you can share some advice for our 26-year-old daughter, who has recently left to travel overseas. She has a KiwiSaver Simplicity growth account with $30,000, and may not return for a while, if at all.
She has both NZ and UK passports. Is she better to retain the KiwiSaver fund or withdraw the balance and invest elsewhere? I think this is possible after one year overseas.
A: There’s no compelling reason for your daughter to move her savings from her New Zealand fund, which charges low fees. Nor should she necessarily stop contributing to it. That fund might well perform as well as UK options.
If she gets a job over there that comes with employer contributions to a pension scheme - like the young person in the previous Q&A - she should take advantage by joining and contributing to that.
But her KiwiSaver money could still stay where it is – available to be cashed in at some stage for a first home or some other purpose.
Q: My KiwiSaver balanced fund shows a 5.93 per cent growth in the year to August 31, 2023. Overall it is trending up. But here is my question: how much of that increase is from the investment work of my fund manager?
I make a regular extra contribution of $200 a week as well as the 10 per cent that comes off my salary. I think the growth comes from my personal contributions rather than my fund manager’s hard work. What do you think?
A: A great question, especially from someone like you who makes significant contributions to your KiwiSaver account. Your fund could be suffering negative returns but your balance would keep growing.
What we need to establish is whether the 5.93 per cent is:
A quick way to check on that is to use the Smart Investor tool on sorted.org.nz. The returns for your fund reported there don’t include contributions. Just make sure you’re comparing the same periods – although if they are slightly different periods that won’t usually affect the returns too much.
An interesting note: soon after KiwiSaver started in 2007, fund returns were hit hard by the Global Financial Crisis. But back in those days, most people’s KiwiSaver balances were still low. So regular contributions made a big difference to balances, to some extent masking the fact that a balance would have fallen a long way without the new money coming in.
On the other hand, by early 2020 when the Covid pandemic hit markets hard, most people’s KiwiSaver balances were much higher, so regular contributions didn’t have much of an offsetting effect. It seemed to me that more people panicked.
And from now on, as balances continue to grow, the offsetting effect of contributions on losses will be smaller and smaller.
- Mary Holm, ONZM, 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 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. 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.
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