Mary Holm: Flash car will chew up that money

Expensive vehicles quickly depreciate. Photo / Thinkstock

I see in your latest column yet another reason the Government gives us to not save any money, or you will be penalised for your savings.

The governing bodies lead the way with spend, spend mentalities with no regard for tomorrow. But why do they hint that we should save money so they can rip off the savers when they do?

Me, I am off to the prestige car-dealers to see if anything tickles my fancy.

My father, who was a businessman, used to say: "There's only one thing worse than having to pay tax, and that's not having to pay tax" - because you weren't making a profit.

Similarly, there's one thing worse than having retirement savings, and that's not having them. Sure, if you have considerable savings, you won't get a rest-home subsidy - as discussed in last week's column. And you may also be ineligible for some other government assistance. But people with savings are always going to be better off than people without savings.

This is especially true in New Zealand, which is unusual in that NZ Super is paid regardless of the recipient's wealth.

Of course, that might not continue. A future government, struggling to fund baby boomers' retirements, might reduce Super payments to better-off retirees. But I bet they wouldn't cut a full dollar off Super for every dollar of income from other savings. Savers would still receive higher total income.

How can I be sure? Think of the number of voters in and near retirement - plus their families. Also, think of the message a dollar-for-dollar cut would send to younger people, who would be likely to stop saving.

The argument is even stronger if we look at KiwiSaver. If you don't join for fear that having KiwiSaver money might reduce your future NZ Super payments, you deny yourself the kick-start and tax credits. You give up definite government money now to gain possible government money in the future. Employees also give up employer contributions in most cases. It's flawed thinking.

There's another issue here, too. Do you really think the government should give rest-home subsidies - and other benefits - to everyone, regardless of their wealth? Tax rates would have to soar.

Not convinced? Enjoy your expensive cars - which must be one of the best ways to chew up money, given how quickly they depreciate.

I hope you also enjoy your retirement, living on just NZ Super with fingers crossed that the Government keeps the payments at current levels relative to wages. There's no guarantee of that either.

Rest-home figure low

Just reminding your readers that only 5 per cent of people ever end up in rest homes, and only 10 per cent in retirement villages. The other 85 per cent live out their lives in their own homes or rentals. It's another reason that trusts may not be worth contemplating.

I did an evening course on trusts many years ago. I was mainly trying to safeguard myself against the Property Relationships Act - I can't believe National hasn't changed it to "contract in", but that's another story.

Back then I concluded trusts weren't worth it, for me - I would lose easy access and control of my money, they involved effort and money to run, I couldn't get all my assets into it for 20+ years (at $27,000 per year), and the risk the trust could be set aside if not set up or run exactly right.

Removal of the $27,000 limit makes a big difference, but I still want to retain free access and control. If only the government would make relationship financials "contract in" rather than the current "contract out".

Try as I might, I haven't been able to confirm your figures about the chances of ending up in a rest home or retirement village. (When I checked back with you, you said you just remembered reading them somewhere "a long time ago".)

However, your numbers look too low. The Retirement Commission and the Retirement Policy and Research Centre (RPRC) say that while about 5 per cent of New Zealanders over 65 are in retirement villages at any given time and nearly 6 per cent are in residential care - mainly rest homes or long-term hospital care - this is a snapshot.

"Over the course of your retirement, you may have a quite high chance of needing care," says economist Susan St John of RPRC.

"The number of people over 65 who die this year is a much smaller number than the number of those currently over 65 who will die."

And the odds of being in care change fast as you get older. According to an RPRC paper by St John and Claire Dale, at 85 the probability of being in long-term care is less than 10 per cent, but by 90 it's around 25 per cent, by 95 it's slightly less than half and by 100 slightly more than half.

St John notes that "what is also very variable is the time that you might spend in long-term care".

So your main point - that a large majority don't end up in rest homes - is not quite valid. And even if it was, that doesn't mean we shouldn't think about it.

Most of us insure our homes against destruction by fire, earthquakes, floods and so on, even though only a tiny percentage will lose their homes - recent events aside.

What we really need is insurance to cover rest-home costs. Strangely, though, it's virtually non-existent in New Zealand and elsewhere.

St John and Dale's paper speculates on why. For one thing, if people paid premiums each year, they would probably get too high as they got older. People would tend to drop the insurance right when they most need it.

Alternatively, they could pay a one-off premium at 65 or 70, but insurance companies would find that difficult to price given all the unknowns about inflation, technological changes and so on.

The very fact that such insurance barely exists suggests it just won't work in the private sector, say St John and Dale. They propose some alternatives, including an intriguing combination of an annuity - which would pay you a regular amount until you die - and long-term care insurance. If you went into care, the regular payments might treble to cover the costs. This could be tied in with NZ Super.

For more on this, see www.tinyurl.com/stjohndale. It would be great to see the government look into it.

Meanwhile, back to your letter. I agree that trusts make life complicated - unnecessarily so for many people.

As for the relationship money issue, it's tricky. For every scenario in which the current system doesn't work well, there's another in which it does.

Charitable plans

The "oily ragger" in last week's column should follow her own path and never mind what others are doing, or how "wealthy" people are supposed to spend their cash.

I'm what's sometimes referred to as a "multi". I shop happily at hospice shops - they have good stuff. I support local libraries, grow fruit and veges, make lemon curd, chutneys, etc.

Have just made eight portions of delicious soup from one kilogram of parsnips for 99 cents, drive an old ute, live in a small flat, don't drink, don't buy DVDs or other electronic gadgets, and do a very demanding self-created job. I'm totally happy with these choices, and life in general, and one day the charities in my will will hopefully get the dosh.

Good on you. And by the way, setting aside money for charities to inherit is a good way to "insure" against outliving your savings. If you're still around at 90 or 100, you can become the charity, spending that money on yourself.

If lots of people plan such bequests, some will die young enough for the charities to do well.

Earnings truths

Just a note to let you know how I appreciate your reply to "Taxation Truths" last week. A very dignified reply to an almost rude letter to you.

I have always tried to tell my kids the hidden costs of taxation. Often they come to me and say they have bought something at a so-called "bargain price". I then say to them "now add 30 per cent to the actual price", because that's more or less the tax you have had to pay on your income before you buy this so-called bargain. It's a very sobering call, because that's the real price they have paid for the bargain they have purchased.

Oh dear! Your comments certainly would take all the fun out of bargain-hunting. Still, you're quite right, we have to earn about $100 for every $70 we get to spend - or save, for that matter.

Update

A year ago last Sunday, we published a letter from a reader who urged others to buy silver and gold. He made some predictions about their prices and the exchange rate between New Zealand and US dollars, as follows.

For gold: "I am pretty sure we will see US$1600 an ounce by year's end". In fact, the final 2010 price was US$1422 ($1792). That's well up from about US$1300 when he wrote, but it's not US$1600.

"The kiwi [NZ dollar] will go to 80 against the greenback [US dollar] and on to par." He didn't give a date, but I suggested a year later, and he didn't come back and object. Last Sunday, the kiwi was worth US77c, up just 2 cents from when he wrote.

For silver: "over the coming two years or so I see US$100 an ounce". At the time, silver was worth US$22. Last Sunday it was US$31. There's a bit of climbing to do in the next year.

So far, the reader has got none out of two correct, with one more to go. Admittedly, his case has been hurt by recent market moves. In the month ending last Sunday, the kiwi fell nearly 7 per cent, gold about 10 per cent, and silver an alarming 25 per cent. But that just shows how volatile these markets are.

This is not about proving the reader wrong. It's about warning everyone of the dangers of forecasting. I just hope our friend doesn't have too much at stake on the strength of his predictions.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her 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 Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.