Saving $176,000 for a house deposit at age 24 is something to be proud of.
Q: I’m a 24-year-old Aucklander. Current salary about $72,000; KiwiSaver balance about $18,000 (growth fund); student loan about $2300; savings about $176,000.
With the plan of making a deposit on a house within the next one to two years, should I keep reinvesting my savings in term deposits or, with interest rates going down, should some of my savings be invested in managed funds? Also would it be a good idea to increase my KiwiSaver contribution, for employer contributions, from the minimum 3% to the maximum 10%?
A: You’re doing well at your age, especially given you’re not on a particularly high salary. Good on you.
To look at your last question first, most employers contribute 3% of your pay to KiwiSaver if you put in 3% or more, although a few will go beyond 3% if you do. Ask – and contribute whatever it takes to get the highest employer contribution.
But if your boss pays the usual 3% maximum, there’s no real reason to save extra inside KiwiSaver versus elsewhere – unless you are the type to blow accessible savings on holidays, cars, clothes and so on. But clearly that’s not you!
It’s a good idea, though, to set up automatic transfers to your savings of whatever percentage of your pay you can afford. You don’t need to involve your employer.
The other big issue is the risk level of your savings. If you were planning to buy the house in 10 years or more, I would suggest saving in growth or aggressive funds, in or out of KiwiSaver. They would probably give you the highest long-term returns.
But if your big purchase will be sooner than that, the problem with those funds is their volatility. You don’t want to take the risk of seeing your savings plunge shortly before you plan to buy. Or do you?
Some people planning to buy a home within a few years leave their savings in a high-risk fund. Then, if the markets drop, they postpone their purchase until the inevitable recovery, which could take anything from a month or so to several years. But if all goes well, they might get to buy sooner, or bigger. It’s a gamble.
However, most people like more control over the timing of their purchase. Once they get within 10 years or so of buying, it’s best to reduce risk to, say, a balanced fund, in or out of KiwiSaver. And with two or three years to go, a conservative fund is a good choice.
Whatever you do, you should move your money to a bank account or one-month term deposits once you’re about to start looking at homes. You don’t want any fluctuations in value at that stage.
Q: I am 70 years old. A prenup between me and my late wife allows me to live five years in her house after her death. I have four years to go. I own a rental which returns 3.5% per year ($550 per week) on the estimated value of $800,000.
I am now considering selling the rental this summer and investing the money in my KiwiSaver, which would have about $40,000 at the time of sale. It’s in a growth fund returning about 7 to 8% per year.
The benefits, as I see them, are: removing my liabilities and rental costs; better return for my money from KiwiSaver vs rental income; freeing up cash for holiday travels; using my KiwiSaver funds to financially contribute towards purchasing a house with my partner in the future.
Your thoughts about this plan please.
A: First, you won’t necessarily keep getting higher returns in KiwiSaver than from your rental. Property values might start growing fast, or KiwiSaver returns might fall.
And there are arguments against selling your rental now. With house prices down, it’s not a great time to go on the market. Also, you plan to use some of the proceeds from the rental to help buy a house, presumably in a few years. You would be pretty unhappy if house prices rise fast between selling and buying. If you stay in the market, you eliminate that risk.
On the other hand, if you plan to spend most of the proceeds from the rental on holidays and so on, keeping it may not make much sense. There’s nothing wrong with owning a rental property later in life if you’ve got plenty of cash for spending. But, unlike investments in KiwiSaver funds or shares, you can’t gradually use up the money tied up in a property. It’s such a pity to see a retired landlord pinching pennies and then dying with an asset worth hundreds of thousands of dollars or more.
Another issue is hassle – with maintenance, tenants and so on. KiwiSaver and similar investments are much easier in that respect. Also, it sounds as if, psychologically as well as financially, you would love to get rid of rental expenses.
In the end, the right decision probably depends on how much of the proceeds from the rental would go to spending and how much would go to a new home.
Q: I have an anecdote on taxation from my long-deceased father. He was an accountant who lectured part-time in accounting at what was then the Waikato Technical Institute.
Company tax used to be graduated like PAYE is now. The tax rate increased the more the company earned. So owners set up multiple companies under the main company, so the smaller companies enjoyed a lower tax rate.
So Parliament passed a law that if the main company had a greater than 50% shareholding in the sub-company, the sub-company was the same as the main company for taxation purposes.
Then the company accountants did something different, and so a new law was passed, and so on. There was a 2cm thick textbook on company taxation, and an entire semester course (which my father lectured) purely on company taxation.
Then Roger Douglas introduced a flat tax for companies. The textbook went into the rubbish bin and the course was cancelled. So much for simplifying the tax system.
A: What a pity the textbook got dumped. I imagine it would be a great cure for insomnia!
There’s a lot to be said for the simplicity of flat taxes. But if we applied that idea to income tax, for example, we would lose the opportunity to charge more tax to those who can pay more.
Let’s say we taxed everyone’s income at 20% of every dollar earned. New entrants to the workforce and those with few qualifications – sometimes through no fault of their own – would pay considerably higher tax than currently. That’s not exactly encouraging. Meanwhile, for people earning $1 million a year or more, paying 20% tax would be chicken feed.
In most countries we compare ourselves with, the tax rate rises as income rises. It does introduce complications, with some people trying to get around the system. But I think it’s better than a flat income tax.
Q: My husband (63) and I (61) are in the lucky position to be able to pay off our mortgage in March. Currently, we are both working full-time with a net income of $4700 a fortnight. We have been paying $2000 a fortnight into our mortgage, which has been manageable (just).
Anyway, the question is what should we do with this $2000 once we no longer have to pay for the mortgage? We have combined ANZ KiwiSaver accounts of $220,000 (paying in 6% each) and are hoping to continue working fulltime until I am 65. We are both open to doing part-time, stress-free work after 65. According to sorted.co.nz we will have around $300,000 in KiwiSaver by the time I am 65. We are also hoping to downsize our house and get at least $200,000 in equity. We have no separate savings.
Should the $2000 go into KiwiSaver, or should we set up term deposits or another saving mechanism? We are not too savvy with bonds and shares.
A: Yes you are luckier than many. But you, like our first reader today, also deserve congratulations for being such good savers. Putting more than 40% of your take-home pay into mortgage repayments, while also contributing 6% each into KiwiSaver, is commendable.
You don’t mention having a rainy day fund – just in case things go wrong. I suggest you make that your first priority for the $2000 per fortnight until you have, say, $30,000. While you could probably withdraw KiwiSaver money in a financial crisis, it’s more straightforward to have ready access to the money, perhaps in bank term deposits that are set up so some matures every month.
After that’s set up, yes, KiwiSaver is a good place for the extra savings. Ask your provider to help you set up transfers directly into your KiwiSaver accounts.
As you approach retirement, I suggest you use more than one KiwiSaver fund – putting money you expect to spend within about three years in low risk, three-to-10-year money in medium risk, and longer-term money in higher risk, if you can cope with volatility.
Q: What advice do you have for grandparents wanting to support their grandchildren in education or buying a first home? My wife and I have a 7-year-old granddaughter and would like to give her about $1000 each birthday to save.
Her parents sometimes struggle with money, so we want to ensure that if they can’t help our granddaughter financially in the future, we can have a nest egg for her.
Should we open a joint investment account with her? Alternatively, should we open a KiwiSaver account for her, and take advantage of the Government’s $521.43 annual contribution, recognising that this can generally only be used for funding retirement or buying a first home. But the 50% return on investment looks enticing, especially when compounding over 10 or 15 years or longer!
A: A lovely idea – and one many grandparents will relate to. Unfortunately, though, children don’t get the Government contribution until they are 18. And, by the way, if a teen gets a part-time job, their employer doesn’t have to put in 3% of their pay until the young person is 18, although many employers do anyway.
Still, it’s great to get a child into KiwiSaver. The money will grow anyway, and they’re set up to start receiving the Government contribution from 18. That’s a time when help from a parent, grandparent or friend can be especially good. The young person may be studying or otherwise not earning, and if somebody else deposits up to $1043 in their KiwiSaver account, they’ll get the government money.
As you say, that Government input gives you a 50% return – 50c for every dollar you put in – in the first year. After that, your money earns “only” whatever your fund earns. But still, the boost at the start is really helpful.
As you also say, KiwiSaver money can usually be used only for a first home or retirement. So if you would like to also help with education costs, you may want to put, say, half the money in a non-KiwiSaver fund – perhaps with the same provider.
Note that grandparents can’t open a KiwiSaver account for a child. The parents or guardians have to do that. But surely they would co-operate. Once the account is open, you can send money directly to it. The provider should help you set that up.
Other readers who can’t afford $1000 a year can help out young ones with a smaller amount. It all adds up. You might find it easier to contribute, say, $10 a week, or $20 a month.
One more thing: Anyone setting up something like this might want to allow for a similar plan for any other grandkids who come along.
* 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 or click here. 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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