Mary Holm: Caught in a storm, but we're still far from sinking

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COMMENT:

Q: I am 68 and my wife 66, and we have recently retired. We have just sold our home and bought in a small town on Auckland's fringe.

We will have $350,000 from the trade-down transaction. We also have $80,000 in term deposits.

We have a pessimistic view about the future of financial assets. Even gold or silver. We are also worried about the stability of banks and negative interest rates.

So our problem is: which physical assets could provide an income stream and/or good backup for tough times ahead? An example might be a large vegetable garden, as our property-to-be is a third of an acre.

We want to do this relatively quickly. We do not want to be caught out by financial after-effects from the Covid-19 lockdown.

We would appreciate your advice on our nervousness around financial assets, as there may be other readers sinking in the same boat.

A: The boat might be heading into a storm, but she's a seaworthy vessel and won't sink.

Your letter must be one of the bleakest ever sent to this column. Things are not that bad — honestly.

At first glance, the answer to your question would seem to be cheap rental property. But houses in good shape aren't cheap enough, even in the countryside.

And while you would receive rent — hopefully — you would be tying up your savings in an asset that's likely to lose value, at least over the next year or two. Even if the value later grows, you can't spend that money.

The vegie garden idea is good, plus some fruit trees. If you are keen gardeners, you could grow some interesting varieties to feed yourselves and sell at a local farmers market. You might also buy hens and perhaps even a cow for milk and cheese.

You could also look into solar energy, and read up on how self-sufficient people manage without using money. But it will be a challenge.

What do most retired people spend on? According to Massey University's retirement expenditure guidelines, two-person households living outside "metro" areas spend most on housing and household utilities, which for you would include rates, maintenance and energy — if you are not DIYing the energy.

Next comes food, which we've already discussed, and transport. Would it be feasible to use bikes or e-bikes? Then there's recreation and culture, which is obviously spending that is very shrinkable.

We could go on, but it's probably best if you check the guidelines to see what applies to you. The report is at tinyurl.com/RetSpending. Appendix 1 is a list of weekly spending for one- and two-person households in metro and provincial areas. It's also broken down into no-frills and choices spending — with the latter obviously including more luxuries.

I don't see how you can avoid needing at least some cash, for such things as rates. And that means parking some of your savings, for future spending, in some kind of investment.

You could choose something like art or collectibles, but it seems to me that they are sitting there waiting for those who don't really know what they're doing to be ripped off by those who do know.

So let's look at whether the main financial assets — shares, bonds and cash, aka bank term deposits — are really in such dire straits.

Shares plunged in March, but have since recovered more than half that fall, in both New Zealand and overseas.

Still, nobody knows where shares will go next. I don't like my chances of talking you into a share-fund investment. You could use a bond fund, which would be somewhat less risky, but it would still have its ups and downs.

In the end, given your worries, you should probably stick with bank term deposits. I know you're concerned about bank stability. But take a look at the Reserve Bank's Financial Strength Dashboard — at tinyurl.com/NZBankStrength — which I wrote about last week.

Our banks don't seem to be at death's door.

What about negative interest rates? I'll be writing about that next week. But in the meantime I wouldn't get too worried.

Another option, of course, is to put cash in a safe or safety deposit box. But make sure it's theftproof, waterproof, fireproof and rat-proof.

Shuffling funds

Q: In your last column, a Simplicity spokesperson said you can have multiple funds with different risk profiles but questioned whether it would make sense.

You often advise having money in low- to high-risk funds depending on the time frame for when the money is required.

We are in our mid-50s with most of our money in higher-risk funds and some in lower-risk funds and cash. I'm aware we should be looking at gradually shifting more towards medium/lower risk as we get older.

Your columns indicate many people have several different risk funds, for various reasons.
So would it make sense to have most money in one balanced (or whichever is most appropriate) fund instead of constant juggling with several? Surely this would have the same end result?

A: The Simplicity spokesperson last week was talking about whether it would make sense to be in five different types of funds. It would be hard to justify that many.

But there are several reasons for being in more than one fund, in or out of KiwiSaver:

• You're transitioning into a higher-risk fund to get higher average returns over the long run, and you can cope with volatility. But it's better not to move all the money at once.

• You're transitioning into a lower-risk fund because the time you plan to spend the money is getting nearer, or you've realised you can't cope with high volatility. Again, a gradual move works better.

• You're trying out a higher-risk fund, but with just a portion of your money at first to see if you can cope with higher volatility.

• You're planning to spend some, but not all, of your KiwiSaver money on a first home, within the next 10 years. So you have that money in lower risk, but the rest in higher risk to get the greater long-term growth.

• Perhaps the most common reason: in retirement, you want your short-term spending money to be in low risk, your medium-term money in middle risk and your long-term money in higher risk.

The first three reasons apply just for a while — perhaps a few months. And I'm sure you can see why having all your money in one fund wouldn't work in those situations.

But the last two reasons might apply for years. So why not just average things out and hold all your money in a medium-risk balanced fund?

The answer depends on your spending plans. Here's the golden rule: don't expose money you expect to spend within the next three years to the risk of a sharemarket downturn.

Let's say you've ignored the rule, and all your money is in a balanced fund. You're about to withdraw some to buy a home or spend in retirement. About half the investments in your fund will be shares, and if the sharemarket has fallen recently, your withdrawal is the equivalent of selling shares at a low price. Not good.

If, instead, you had some of your money in a high-risk fund and some in low-risk, you could make your withdrawal from the low-risk one. Sure, your high-risk investment will have fallen in the downturn, but you're not touching that money for years, so it has time to recover.

So where are we? If you're saving for retirement several decades away, having all your money in a balanced fund will bring you much the same results as having half in low-risk and half in high-risk.

But if you plan to spend some of the money sooner, use more than one fund.

Bankrupt buyer

Q: I know a couple (now married) who couldn't get a joint tenancy mortgage because he was an undischarged bankrupt. She, alone, bought a property (with a mortgage) and his lawyer ensured there was a watertight pre-nup protecting his interest in the property. Perhaps this is a way of getting your correspondent off the debt treadmill.

A: You're referring to last week's first Q&A, in which a young couple are struggling to buy a house because of the man's involvement in his parents' mortgage.

Your idea is not a bad one. But it would stop him from possibly taking advantage of first-home help through KiwiSaver. And her income would have to be high enough to get the loan on her own.

Also, ideally, two members of a couple have equal interest in their home.

I would rather see the couple sort their situation through the steps suggested last week. But thanks for writing.

Sorry, accountants

Q: Thank you for publishing my letter in your column last week. However, no thanks for the dig at accountants' "fascination" with tax. It appears that in this year of "being kind", you may have taken the day off!

Taxpayers using incorrect PIE rates is a big problem that IRD has been actively policing. If you use a PIE rate that is too low, you can be subject to penalties. If you use a rate too high, you cannot get the tax back. It is a lose-lose situation for those not paying attention.

My apologies for the adding error. Clearly the 70 per cent figure should have read 80 per cent. It is a shame you chose not to correct the error as it did highlight how the top 20 per cent of taxpayers pay 80 per cent of the tax.

A: Again, I'm starting my reply to you with, "Oh, dear". One person's gentle tease can be another person's taunt. Sorry if I was unkind.

You're right that the taxation of PIEs seems unfair. However, after a kerfuffle last year when Inland Revenue told 120,000 people they were paying too little tax on KiwiSaver and would have to pay more, the department is at least now trying to be helpful.

It says on its website, "If you're enrolling into KiwiSaver for the first time we may let you and your scheme provider know what we think your prescribed investor rate should be. We base this on the income information we have in your myIR account."

This service, plus the publicity last year, hopefully mean most people are now paying the correct tax on their KiwiSaver income.

The fact that just 20 per cent of taxpayers pay 80 per cent of the tax is indeed noteworthy. The latest numbers I can find, from Treasury, say the top 20 per cent actually pay 64 per cent of tax, but you might be using a different definition of tax.

Anyway, the situation is because we — and most countries — have "progressive" tax rates. For example, people earning less than $14,000 a year pay 10.5 per cent on each dollar earned, while higher-income people pay 33 per cent on every dollar they earn over $70,000.

I'm comfortable with that, but not everyone is. Unhappy people might want to recall that back in the 1980s the top tax rate was 66 per cent, so the imbalance would have been much greater.

- 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.