Q: Could you please tell me what I am missing here. We live in a small town and have been mortgage-free for some time, and have about $100,000 in savings and the same between us in KiwiSaver. My wife wants to sell our $400,000 house and rent so as we have plenty of money to spend on holidays etc when we retire next year. It seems like a good idea but nobody else does it. What important factor am I missing?
A: Two factors. You need enough savings to cover rent for the rest of your lives. And as tenants you lose some control over your home, including when you might have to move out.
Still, I admire your independent thinking. Many New Zealanders see home ownership as the only way to go. If they don't own a home, they badly want to.
But in parts of Europe, most people never own their home, and lead contented lives.
Meanwhile, many New Zealanders die with a home worth hundreds of thousands of dollars, having been short of cash in retirement.
So let's look at the two factors. Firstly, what can you do about money for rent? Try these steps:
• Find out, online, how much rent you would currently pay for a home you would like to live in. Let's say it's $400 a week.
• Work out how much you spend on house expenses per year — including rates, insurance and an average spend on maintenance. Divide by 52 to get a weekly amount. Let's say it's $100 a week.
• The difference between the two numbers — $300 a week — is how much extra you would spend on housing.
Mary Holm: Practical advice to help ease the financial cost of Christmas
• Calculate how much to set aside to cover this. One rule of thumb: If you retire at 65 with $100,000, you can spend $100 a week. So you would need to set aside $300,000 to cover housing.
If I were you, I would add another $200,000, so you have an extra $200 a week for living costs over and above NZ Super.
Your savings plus house sale proceeds total $600,000, so that leaves you with $100,000 to play with — or perhaps $50,000 so you have a rainy day fund.
What should you do with the $300,000 plus $200,000? You could invest in a conservative KiwiSaver fund. You'll earn returns on the money, but the balance will gradually fall towards zero because of your withdrawals.
You should be able to cope with inflationary rent increases. But to be more confident of that, invest the money you won't need for three years or more in riskier funds with higher average returns. I've explained this many times in this column — or see my book, Rich Enough? A Laid-back Guide for Every Kiwi.
What about the problems of being a tenant? As a retired couple with savings, you will probably be desirable to landlords. Try to negotiate a long-term lease, perhaps after a trial year for both you and the landlord. And you may want to include rights to decorate and garden as you wish. One other way to release money from your home is to take out a reverse mortgage — although I'm not keen on them early in retirement as they can grow lots over the years. There's more on that, too, in the book. (I'm not trying to push the book. It's just that I can't put everything in one short column!)
Eggs in one basket?
The thing is both accounts are with the same bank.
I say this is an "eggs in one basket" scenario and one of us should change. My husband (and the bank's financial adviser) says it's all diversified anyway and we don't need to.
What do you think? It might help settle this running topic between us.
A: I don't think you need to change because you are both with the same bank. The Reserve Bank — which regulates banks — has recently made the banks take further steps to strengthen their finances, so any kind of bank collapse seems highly unlikely.
However, I don't think many of the banks are particularly good KiwiSaver providers. Too many people have their KiwiSaver account with their bank because the bank suggested it — hardly a good reason! It's a bit like your bank adviser telling you to stay with them. How amazing!
For some tips on how to choose your best KiwiSaver provider, read on.
AMP says the PRR "calculates your investment percentage return based on the opening balance, the cash flows (eg contributions, withdrawals etc) in the account and the closing balance for the period. The personal rate of return is before tax and net of fees." Online, the KiwiSaver Fund Finder on sorted.org tells me that the Conservative Fund return for the year ending September 2019 is 5.19 per cent, and for the Moderate Fund it's 5.34 per cent.
So my question is, should we change providers based on Sorted's relatively low figure for our current provider, or should we consider our PRR as being reasonably good?
A: Neither. Choosing providers based on returns — and especially one-year returns — is not clever. And funnily enough, your research proves it.
But first, why are the AMP and Sorted numbers different? Several reasons:
• AMP's calculation makes allowances for contributions or withdrawals you've made during the year.
For example, if you make a contribution halfway through the year, and returns on the fund are higher in the second half, your return will be higher than the fund's annual return — to reflect that you had more in the fund during its better half. But if returns in the second half were lower, your return would be lower than the fund's annual return.
Confused? Let's just say timing of contributions affects the numbers.
• While both numbers are after fees, only Sorted's return is after tax. "It also uses the highest Prescribed Investor Rate (PIR) of 28 per cent, and doesn't consider all funds a client may be invested in to provide a consolidated view across their KiwiSaver account (like PRR does)," says an AMP spokesperson.
• The numbers are for different periods. And, as it happens, that makes a huge difference.
The Sorted year started on 1 October 2018, and in the first three months there were particularly bad returns, which were largely over by 6 December when the AMP year started. And then, this year, the Sorted year ended on 30 September, before a particularly good last few months.
This highlights how you can get a wrong impression by looking at short-term returns. Even long-term returns — over, say, a decade or more — don't give us much useful information. Often a fund that did well last decade does badly next decade.
So I suggest you look at returns — and only long-term ones — to rule out funds that have repeatedly performed badly, and to see how volatile their annual returns are. But that's all.
A better way to choose a provider is to compare their fees, on the Sorted KiwiSaver Fund Finder, with fees charged by other funds of the same type. While returns are all over the place, fees rarely change.
It's also good to check that the provider's services are above average.
Impact of index funds
I run Kernel, which is a New Zealand index fund manager. We actually addressed this very question when we had S&P people — who run more than a million stock market indexes each day — over for our launch.
The key point: critics of index investing, i.e. active fund managers, typically like to point to the percentage of the market held by index funds, which in the US is about 25 per cent. (NZ index funds hold less than 3 per cent of the NZ market).
But, as your reader noted, it is the share of trading that matters, because it is trading that sets market prices.
S&P modelled this by assuming 50 per cent turnover (a measure of how often the shares in a fund are traded) in active funds and 10 per cent in passive, which is conservative. It's more like 100 per cent and 5 per cent. Under this model, index market share has to get to around 83 per cent before index trading is responsible for just half of the trading volume.
Vanguard and Blackrock, two huge index fund managers, have both done studies using actual US trading data, and the results aligned with S&P's model to date.
So in short, there is a long way to go before any concerns can be raised about efficient market pricing based on the share of the market held by index funds.
A: You make a really good point. Basically, because index fund managers trade much less than active fund managers, their impact on prices is much less.
There'll be more on index funds — and their fees — in my first column next year.
I have owned motorhomes and a bach and shares and have now converted these investments to cash, all of which is invested in bank term deposits. We are in our eighties now and happy to have everything so tidy thanks to you.
I recall some years ago complaining about ASB preference shares costing $1 and dropping to 80 cents. You said hang in there, and I did. Now the cherry is on the cake as ASB are buying back the shares at $1. So thanks again. I still read your column of course but will now relax and enjoy retirement.
A: And thanks so much to you for such an encouraging letter.
I don't usually run emails like yours in my column. But it's Christmas, so why not!
This is my last 2019 column. Thanks to everyone who has written in through the year.
And sorry to the many readers whose letters didn't make it into the column. Do keep watching for several months, though. Sometimes I pull something out of the "old emails box" because it goes well with another more recent letter. I hope everyone has a wonderful break over Christmas. And when you're driving, be terrific in traffic:
• Let people in.
• Pull over if cars are behind you.
• Thank people who do you favours with a wave, a beep, or a flash of your lights.
Being a kind driver does make you happier. I've tried it!
See you back here on January 25.
- 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.