Getting the mortgage down to size means you can get on with serious retirement saving. Photo / 123RF
COMMENT:
Q: I've been working hard to chew through my mortgage as fast as I can. By my rough calculations, I have cut my repayment time from 20 years to 13.
One of my secret joys is noting the widening difference between principal and interest payments.
This is how I'm paying it down:
• I've never reduced the payments as interest rates have fallen.
• I've increased payments with pay increases and promotions (helpful when I hated one better-paying role and moved back to a lesser-paying one. I hadn't got used to spending the extra money).
• I budget every year based on my minimum pay (I'm a shift worker and it varies) and maximum bills (for example, my power hits $150 in winter so I budget on that year-round). I have started to put the difference into a "skimming" account to pay down the mortgage at fixing time. It adds up surprisingly quickly!
A: All three of your ideas are brilliant. And the second and third ones also work well for people who want to boost their savings.
As you note, over time the interest component of your mortgage payments gets smaller and smaller, and the debt repayment larger and larger. In the last few years, it's great to see how fast the debt disappears.
I should note here that, in these days of low mortgage interest rates, there's an argument for investing any spare cash rather than paying off your mortgage faster.
But for that to work well, the investment needs to earn more, after fees and tax, than your mortgage interest rate. That means being in a riskier investment, and sticking with it through market ups and downs.
Even if you cope well with volatility, there's still much to be said for getting rid of your mortgage first. It means you can get on with serious retirement saving, and can probably borrow again if you hit tough times.
Q: I have recently inherited some money. I have no mortgage, and am comfortably provided for with retirement income.
Among my various options, I am considering putting aside a chunk of my inheritance to pay for unexpected health problems instead of paying for health insurance.
How much should I put aside now? And how should I handle the chunk of money as I age?
A: Your first question is a classic "how long is a piece of string?" one. Who knows?
Because of that, I suggest you go only halfway with your plan.
You never know what complicated health issue might arise — something that would put you on a long waiting list in the public health system or would cost a heap if you pay yourself. You might need to see several specialists or have several rounds of surgery — and it might go on for years.
If bad health strikes, the last thing you'll want is money worries as well. So it's better to have insurance for, say, surgery and specialists' fees. Although you might use it only rarely, you're not just buying cover but also peace of mind.
However, as long as you have enough money, it's fine not to insure for GP visits and minor health expenses. That will make your premiums considerably cheaper. If I were you, I would use some of the inheritance to pay those premiums.
How much should you put aside? You can roughly estimate your premiums over the years by looking at rates for different age groups. You will also have a rough idea of how much you're likely to spend on GPs. Don't allow for inflation, as investment returns should cover that.
How should you invest the money? Just put it with your other savings. Have money you plan to spend soon in lower-risk investments, and longer-term money in higher-risk investments if you can tolerate volatility — as outlined often in this column and in my book, Rich Enough? A Laid-back Guide for Every Kiwi.
PS: I hope you also spend some of the inheritance on treats.
Q: A correspondent last week expressed disappointment about still having only $5 in Bonus Bonds after 48 years with no prize.
Although there is nothing to say that $5 won't win $1 million in the first draw and another $1m in the following draw, which would clearly be a surprise, your correspondent should equally not be surprised if he or she has to wait 500 years to win $20.
That's the maths. Odds of 1 in 32,000 of winning, and a $5 investment, imply it might take up to 6000 draws, or 500 years, to win a prize, and it might be minimal. Perhaps another 452 years to go ...
A: You're so right. Thanks for giving us all a stats lesson.
Q: An interesting question posed by your Bonus Bonds aficionado two weeks ago: "Do you know of any other at-call bank account that pays anything after tax even close to 0.75 per cent, without other conditions?".
I'm playing a bit fast and loose with the "no conditions" part, but your correspondent might want to check out the Bonus Savings Accounts page on interest.co.nz.
While these accounts definitely have conditions, some seem good for money you don't expect to spend but want on call. Specifically, the ASB and BNZ offerings don't require regular contributions, just limited withdrawals to get the bonus interest. These seem to operate like an on-call account. If you need the money you just don't get the interest if you withdraw.
As long as you're getting the bonus interest, they do pay out above 0.75 per cent (1.5 per cent and 1.4 per cent gross respectively). Good for an emergency fund.
A: True. But these types of accounts are complicated. Take, for example, ASB's Savings Plus account.
"You can make one withdrawal within the first five days of each quarter and lose no interest. You can also make one other withdrawal per quarter and lose only some interest. If you make more withdrawals, you get only base interest," which is just 0.1 per cent, says an ASB spokeswoman.
"Balances above $2m earn base interest only. We also proactively send customers with the Savings Plus account communications advising them if they have not earned reward interest in the previous quarter and giving them tips on how they can achieve full reward interest in the future.
"In addition, if customers transfer funds from these accounts, we provide a warning to them that they may lose some or all of their reward interest."
It's nice that the bank sends tips and issues warnings. But if the rules were simpler, it wouldn't have to.
A recent Newsroom article about all the big four banks' bonus savings products says, "by the banks' own calculations, somewhere between 20 per cent and 33 per cent of customers miss out on their bonus interest rate every month because they don't meet the criteria."
Overall, Newsroom calculates that "a third of all money that Kiwis put into New Zealand's big four Australian-owned banks is paying a 0.1 per cent interest rate or less."
Presumably, that's because there are too many rules around products that offer more.
Newsroom adds that New Zealand-owned Heartland Bank offers a flexible savings product paying 1.6 per cent, with unlimited withdrawals.
One other point to note: the Bonus Bonds' average return of 0.75 per cent is not taxed. So that should be compared with after-tax returns from the banks.
Q: You asked if there was an easier way to give to charities. There is! Generous people can fulfil all their philanthropic desires through their local community foundation.
They can choose to give now or through a gift in their will, and their gift can be invested, with the income earned going to the causes that they love. That way they can opt out of ongoing charity letters and emails.
Through community foundations, people can support anything as specific as their local church or as broad as their beloved national charity. Community foundations offer tailored solutions for people who are coming towards the end of their life and who may not know what do with their wealth, enabling them to support causes that they choose forever.
I'm the executive officer of Community Foundations, and our work is growing across New Zealand. See more at communityfoundations.org.nz.
A: This is a free ad for your service, but why not! You are not-for-profit, and while I know nothing about community foundations, it seems from your website that you do good work.
Q: After reading about correspondents' experiences with charities, I'm really proud of the one I work for which operates on a "no-solicitation" basis.
We as a family have had some distasteful experiences with aggressive solicitation. In one case I had to formally complain to an organisation that kept sending "donation invoices" to my father.
I currently use The Gift Trust to deal with the bulk of my donations. It is a charity itself that administers and corresponds, donating on behalf of donors to allow them to enjoy the good feeling without the hassle.
You can set up gift accounts like charitable savings accounts with a minimum $1000. You can choose to remain anonymous if you wish.
This also means that only one charity (that is, the Gift Trust) needs to be listed in your tax rebate form, and the trust deals with multiple recipients.
I found its service very personalised and prompt, at an annual fee starting from $300. It can also help you to administer bequests. Find out more at thegifttrust.org.nz.
A: Again, I know nothing about this organisation, but it seems worth looking into.
Okay, enough letters about charitable giving. Thanks for all your suggestions, including some that didn't make it into the paper.
It seems that many New Zealanders are generous. Said one correspondent: "Although my wife and I are reliant on NZ Super for about 65 per cent of our joint income, between us, in the year to March 2019, we made 72 donations." Wow.
I'll just add one last idea from a friend in America. At the start of each year, he puts aside, say, $2000. Then throughout the year, if he has an unexpected expense — maybe a dental bill or parking ticket or car breakdown — he uses some of that money.
At the end of the year, his favourite charity gets the rest.
It makes the bills painless — even if not the toothache! And over the years, the charity does well.
Q: It would be helpful if you could screen the letters that are printed in the Herald. Specifically, last week's letter from the entitled rich person who seems unaware that for some it is impossible to save for a reasonable retirement when earning a lower wage, with possibly a large family and parents to support for most of their working life.
Not everyone has wealthy parents who can provide the best in education and future support.
Your correspondent gave it away when he or she admitted their inheritance was not life-changing for them!
A: First, I don't screen out letters because of the writer's situation or point of view. The more diversity, the better.
Also, I think you're a bit harsh. The correspondent said, "I am also helping pay for pensions and benefits for those of my generation who did not have the foresight and/or ability to save."
I agree with you that it's easy for people who learn financial skills and get support from their parents to save, and harder for others. But the correspondent did acknowledge that some people are unable to save.
- 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 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.
This recovery is making us sweat, but that might be a good thing in the long run.