It's very powerful to save even quite small amounts over long periods says Mary Holm. Photo / File
OPINION:
Question: My grandson is shortly being christened and I thought of opening a KiwiSaver account for him with regular annual contributions. Is this the right thing to do? Could you suggest the right investment for his future.
Answer: Lucky grandson! This is a great idea, which he might not appreciate at 8, but probably will at 18, and from then on.
In any situation, it works well to contribute the same amount on a regular basis to say, a share fund or higher-risk KiwiSaver fund, regardless of what the markets are doing.
It means that your yearly $1000 – or whatever the amount is – buys more units in the fund when the markets are down. So you end up buying more cheap units and fewer expensive units. That's got to be good!
And over the long run, this sort of investment grows impressively. At $1000 a year, if the return averages 5 per cent after fees and tax – a typical share fund return - it will total nearly $35,000 after 20 years. With luck, at 6 per cent it will total $39,000.
Next question: what to invest in for a little grandchild? A low-fee KiwiSaver fund that invests largely in shares – called an aggressive fund – should work well. There will be lots of ups and downs, but stick with the fund through thick and thin.
Why KiwiSaver? The fees tend to be lower than in other similar funds, and the regulators watch KiwiSaver fairly closely.
The downside is that the money can be spent only on a first home or in retirement, except in cases of hardship. If your grandson doesn't ever buy a home – and this could well become more common - it will be a long time before he uses the money.
Still, let's say you stop contributing after 20 years and the $35,000 sits in a KiwiSaver fund earning 5 per cent after fees and tax for another 45 years. By then it will total more than $330,000 – plus the growth on other contributions your grandson would hopefully make. Sure, inflation would cut a big hole in the value of that money, but it's not to be sneezed at.
It's very powerful to save even quite small amounts over long periods.
What if you would like your grandson to have access to the money for, perhaps, university or travel or setting up a business? I suggest a similar fund, but outside KiwiSaver. Most KiwiSaver providers also run these. However, the fees may be a bit higher, which can make a big difference over a long period.
P.S. If you can't afford $1000 a month, make it $100 a month. Then divide all the numbers above by 10. So the boy would have $3500 after 20 years, and $33,000 at retirement. That's still pretty nice.
Question: I'm a single mum with one child who has been saving for a house deposit. As we both know, house prices have skyrocketed, and I'm now well and truly priced out of the market. My level of savings cannot keep pace with the deposit required, and I can't afford to service a mortgage over $400,000.
I'm still committed to saving. But I'm now thinking of changing tack, and investing in a private school education for my son's high school years, starting three years from now. I live very rural, and the high school in our nearest town isn't a particularly good option.
I didn't get a great start to life, or good opportunities, and if I can't buy a house, then I'm giving very serious thought into buying an excellent education and increased opportunities for my boy instead.
Financially I can just make it work, as I have secure housing with affordable rent, and have got pretty good at living fairly frugally. Over the next three years I can save enough to pay the bulk of the fees. What's your opinion?
Answer: I would rather see you keep saving for a modest home, or for your retirement. There are two reasons for this:
I'm not convinced that your son would be better off having gone to a private school. I know I'm inviting protests by saying that. And occasionally you hear that "the old school tie" opens some doors. But not many in this country.
So many New Zealanders who are major contributors in every field went to state schools. And many proudly proclaim, "I went to Outinthesticks District High".
In any case, some interesting research suggests that the encouragement and help a child receives at home is more important to their educational success than which school they went to. And it sounds as if you would give your boy plenty of support.
Giving priority to your needs is not selfish. On a plane you are told that in an emergency you should put on your own oxygen mask before helping a child. Similarly, getting yourself financially set up will make it easier to support your boy, financially and in other ways, in the years to come.
You may yet be able to buy a home. There are many modest houses and townhouses being built now, and I wouldn't be surprised if prices fall, or at least stabilise while incomes grow, in the next few years.
There's all sorts of help available for people on lower incomes wanting to buy a home. This includes $5000 grants, or $10,000 on a new home; a loan with just a 5 per cent deposit; and KiwiSaver withdrawal. See the Kainga Ora website.
And if you don't ever get into your own place, it's really important that you save a large sum to cover your rent in retirement. I'm sure your son would rather not be worrying about your financial situation in your old age.
(Footnote: Before the letters come flooding in, in some circumstances a particular child may be better off in a private school, which may offer advantages for that child. But I don't think that applies to most kids.)
Question: My advice to last week's mother with the $700,000 is to buy a house with the money. The cheapest house or unit in the best area is still better than a bank.
It gives her and the children security of ownership and time to work out next steps. The money retains current value relative to the market. If she waits for long the market will beat her every time. Paying rent will eventually eat into the remaining capital she has.
I have purchased and lived in what were regarded as working class deprived suburbs when necessary and yet had the best, nicest neighbours and schools down the road.
Answer: Last week's correspondent said: "It is almost impossible for me to get a loan now for a four-bedroom house, so for the next 12 months or so I am envisioning having to rent, which I am happy to do."
So I assume you are suggesting she buys what she can afford now, and the family stays there for some years.
If, instead, you mean buying a cheaper place and then moving in a year or so, I doubt if that would work well. The process of buying and selling two properties isn't cheap, to say nothing of the hassle.
But if your idea is to buy cheaply and stay put, that has merit. As you say, life in lower-priced areas can be as good or better than elsewhere.
A couple of points about some assumptions about house prices that you – and many others – are making:
You say, "If she waits for long the market will beat her every time." Not quite. While house prices usually rise, they have fallen three times since 2000 – in 2000, 2008 and 2010. It will happen again, we just don't know when.
You say, "The money retains current value relative to the market". But prices can move very differently in different areas.
In June 2019 I wrote in this column: "Recently Auckland house prices dropped 4.4 per cent over a year, while in the rest of the country they rose 6.7 per cent. Even within Auckland, Mt Albert prices fell more than 30 per cent, while they rose about the same amount in Takapuna."
That prompted an angry response from a Mt Albert reader, who said many recent apartment sales had dragged down the suburb's average. Fair enough. But the fact remains that price stories can vary widely across a city and across the country.
Question: Re the recent letter about tenants putting pictures up in rental properties. It would be good to make people aware that along with the right to put pictures up and secure bookcases in case of earthquake etc, obligations come with this.
Under the same tenancy laws the tenant has to make good the walls at the end of the tenancy or risk the repair costs being deducted from their bond.
I would hate tenants to be unaware of this obligation and be caught out down the track.
Answer: Good point. It's all spelt out in the document I referred to last week, which is titled "Reform of the Residential Tenancies Act, Implementation – Frequently Asked Questions." You can find it at tinyurl.com/TenantsNZ.
The relevant section starts at page 13. It includes: "The tenant must return the property to a condition that is similar to the state it was in before the change was made…. unless the landlord agrees that they would like the change to remain.
"Parties should discuss remediation when a change is requested to avoid issues arising at the conclusion of the tenancy.
"What happens if the tenant doesn't meet the conditions set by the landlord for changes to the property? If a dispute arises, a landlord could seek remedy at the Tenancy Tribunal. As well as the cost of remediation, the tenant may be liable for an additional penalty of up to $1,500 if they fail to reverse a minor change that the landlord didn't agree to keep."
Question: I read the letter in your latest column from a person who was frustrated that they could not get the approvals they needed to invest in a private-equity fund designed for wholesale investments.
While such funds do have a higher risk/return profile than a typical growth fund, I think they can still be a worthwhile component in a broader investment portfolio.
However, the issue is that they typically have a minimum investment amount e.g. $100,000, and your money will likely be tied up for seven to 10 years with no option to exit.
I would suggest that for most investors such a fund should not amount to more than 2 to 5 per cent of their portfolio, and thus one would need a portfolio of $2 to $5 million for it to sit comfortably.
Some growth funds however do have a small private equity component, which provides a way to get a more appropriate level of exposure for many investors.
Answer: For the benefit of other readers, a private-equity fund invests in companies that are not listed on a stock exchange. They are often fairly new companies, that might do brilliantly or might crash and burn.
So yes, there are higher potential returns and higher risks. And I have a sneaky feeling that many investors focus a bit too much on one side of that equation!
I agree with your 5 per cent limit - unless the investor could easily cope with losing the lot.
And I like your suggestion to people who want a bit of private-equity action: check out the investments of some growth funds.
• 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.
OPINION: You need to consider interest, taxes and fees.