If you're expecting a higher return from Investment A than Investment B, then A is sure to be riskier. Photo / 123RF
I am 66 and retired. I have a Mercer Conservative KiwiSaver account that returns about 5 per cent and a fixed term deposit of $60,000 with Kiwibank that used to be good but is now returning only about 3 per cent.
A: It seems logical to transfer my fixed deposit to my KiwiSaver account. Is this practical or are there good reasons not to do this?
There's a famous quote attributed to several different economists and philosophers.
Regardless of who first said it, it's certainly true in the financial world: there's no such thing as a free lunch.
In other words, if you're expecting a higher return from Investment A than Investment B, A will be riskier.
If you check out the Mercer Conservative Fund in the KiwiSaver Fund Finder on www.sorted.org.nz, and click on "Show yearly returns", you'll see that in the year ending June 30 the fund's return was 3.94 per cent after fees and tax (at the 28 per cent PIR rate).
In the past few years, returns have sometimes been higher -- up to 7.68 per cent in the year ending March 2015. But that was in a different investment environment. It's probably a good guess that in the near future returns will continue around 3 or 4 per cent. And -- as you say -- that's likely to be more than you'll get in a term deposit after tax.
But -- and this is important -- the fund is somewhat riskier than a term deposit. The Fund Finder tells us that it held the following investments on June 30: bonds 44 per cent, cash 35 per cent (similar to bank term deposits), shares 16 per cent, property 1 per cent and "other" 2 per cent.
Not only does the fund hold 17 to 19 per cent in riskier investments -- depending on what "other" is -- but the value of bonds can also fall.
How? Well, in some ways bonds are like bank term deposits. You pay a given amount, receive interest and hopefully get your money back at the end of the term.
But there are two differences:
• The bond issuer may default, and not pay interest or return your money. While that's also possible with bank term deposits, currently it's highly unlikely. With bonds the chance of default depends on the financial strength of the issuer.
• You can sell a bond part-way through its term. And if you do, its value will usually be either higher or lower than the amount you -- or your KiwiSaver fund -- paid in the first place.
The first difference probably won't apply much to your KiwiSaver fund. The bonds it holds are probably high quality. But the second difference certainly will.
Let's say you or your KiwiSaver fund has bought a newly issued five-year bond paying 4 per cent. A couple of years later market interest rates have risen, and new bonds of a similar risk are now paying 5 per cent. If you go to sell your bond at that stage, nobody will want it unless they can buy it at a bargain price. Its value has fallen.
Of course the opposite can also happen. If interest rates fall to 3 per cent, the value of your 4-per-cent bond will rise.
Your KiwiSaver fund may not buy and sell bonds very often. But it has to keep revaluing its bonds at the price it would get if it did sell them. After all, members are withdrawing money all the time -- for first homes, retirement spending and so on. Their withdrawals need to reflect the value of the fund's investments on the day of their withdrawal.
The constant revaluing of bonds -- coupled with changes in the value of the fund's shares and other riskier investments -- mean your returns in the fund will go up and down, and may sometimes be negative.
So we have a classic investment situation. You're likely to get a higher average return in a conservative KiwiSaver fund than a bank term deposit. But returns will fluctuate.
The constant revaluing of bonds -- coupled with changes in the value of the fund's shares and other riskier investments -- mean your returns in the fund will go up and down, and may sometimes be negative.
If that worries you, another option would be a KiwiSaver cash fund, which is at the lowest risk level. The Fund Finder tells us Mercer's cash fund is fully invested in cash, which means returns shouldn't fall except in really unusual circumstances.
However, the most recent return on that fund is 2.01 per cent after fees and tax. You might well beat that with a term deposit.
Another issue here is access to your money. You're over 65 and -- assuming you've been in KiwiSaver for at least five years -- you can withdraw any or all of your KiwiSaver money whenever you want, with perhaps a day or two's notice. With a term deposit you have to wait for it to mature or, in most cases, pay a penalty.
What's more, many KiwiSaver providers will let you set up regular withdrawals, perhaps monthly. That might decide it for you.
Still unsure? You could always put half in your KiwiSaver account and half in term deposits.
Q: I am over 65, still in employment and have got an active KiwiSaver account, with ANZ.
I am planning to cash up my investment property and expect to make some significant capital gains. Before launching into the next investment (rental?) -- which may take up to a year -- is it possible to lodge the gains to my KiwiSaver account and draw it back when I need it?
I'm thinking of this since a KiwiSaver conservative fund could give a reasonable return as compared to a term deposit. I am not adept at any other form of financial investment and would prefer to stick to something I am familiar with.
A: Anyone can deposit any money into their KiwiSaver account. And, as I said above, you can withdraw money after you turn 65 as long as you've been in KiwiSaver for at least five years.
Beyond that, my reply is pretty much the same as above.
In your case, the investments in the ANZ Conservative Fund on June 30 were: bonds 56 per cent, cash 28 per cent, shares 13 per cent and property 3 per cent. And, the Fund Finder tells us, the return on the fund in the year ending June 30 was 3.86 per cent after fees and tax. In the ANZ cash fund, it was 1.93 per cent.
You didn't ask about this, but I suggest you think carefully before investing in another rental. Unlike a KiwiSaver or other similar account, you can't gradually withdraw money from a rental to enjoy in your retirement.
Q: Just thought I'd respond to your last column. The problem with being a small-town landlord is making the houses pay.
A house that costs $300k and returns $200 a week rent still has to be painted every 10 years at a cost of $10,000. The rates on a house in a small town are often more than in a big city despite the reduced property values.
It's easy to see the meagre rent swallowed up with costs that are the same for any house, no matter where it is.
A: Good point. Although the prices of small-town rental properties haven't ballooned, you're quite right about maintenance costs.
As for rates, I was surprised at what you said, but it's confirmed by a spokesman for Local Government NZ.
"Yes, it would generally be true," he says. "The cost of rates is driven by the ratio between the number of people in an area and the size of the infrastructure they are having to fund.
"Most rural districts have small populations, dispersed over a large area funding a very a large roading network and multiple small water networks (the average rural council has between 15 and 20 quite separate water and wastewater networks servicing small villages and communities).
"Rates in most urban centres are relatively cheap as they have a large number of people concentrated in a relatively small area."
Thanks for the warning.
Q: Reading the twee catalogue of first-world financial dilemmas experienced by "wifey"and "hubby" last week -- with combined pre-tax earnings of $330,000 a year versus the New Zealand median of around $50,000 -- can anybody seriously doubt there is systemic income inequality in this country?
A: Now now! Do I detect a touch of green in your ink?
Your median household income is actually seriously out of date. In June 2015 it was a bit more than $76,000. That's for households in which at least one person is under 65 -- the number that's usually quoted.
Still, the family in the letter does make far more than the median. I'm not clear why you picked on them, though. There have been many other high-income correspondents in this column.
Q: I would like to comment on the letter you received from your Canadian reader, in your column a couple of weeks ago.
I came here with my young family in 1964, from England. When my wife and I reached 65 we applied for our pensions. I was told that in total we would never receive less than the value of the English pension and never more than the New Zealand one. It has been so. Fair enough.
For quite a few years we received part English pension and part New Zealand Superannuation twice a month. The English part did fluctuate with the exchange rate. Sometimes it was to our advantage, other times not. Unhappily, four years ago my wife died. When I went to Winz to cancel her entitlement a very helpful staff member recommended I went over to what is called the special banking option.
Each month the English pension authorities make a payment into a nominated Westpac account (not accessible by me). The New Zealand authorities top this up if necessary. Then every fortnight I receive $769.52 (which includes a living alone allowance), all tax-paid.
Coupled with two small company pensions this income allows me to lead a comfortable, contented life in a small apartment in a retirement village. Except for the absence of my wife I could not be happier.
May I suggest that the Canadian gentleman investigates whether the special banking option is available to him?
I find it is much better than the previous system. I can budget better because I know exactly how much I am going to receive each month.
A: Unfortunately the special banking option isn't available for the reader. It applies only to people who get a state pension from Australia, Ireland, Jersey and Guernsey, the Netherlands or the UK. For more on this see www.tinyurl.com/SpecialBank
People who receive state pensions from other countries are stuck with the direct payment method and payments that vary with exchange rates. Still, as you say, they win some and lose some. And hopefully the fluctuations aren't usually large.
By the way, I like your attitude!
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