You never know what could happen. What if you bought a clifftop house and it slipped down the bank during a cyclone? Photo / Greg Bowker
THREE KEY FACTS
Q: I am determined to pass away with all, or as much as possible, of my savings intact, having lived on the interest. This has taken a lot of juggling, with switching in and out of KiwiSaver and a bit of pure luck, having bought various properties in huge market downturns and then seen them rise massively in subsequent upturns eg a clifftop rural property overlooking the sea for $105,000 during the 2008 crash, putting a house on it for $135,000, then selling it for $650,000. Then I put that into KiwiSaver as the stock markets recovered massively.
Then I’ve been into term deposits over the last two years, earning 6.5%. I’m a bit stuck now as the interest drops, but I’m working on it, which I enjoy.
A: Hmmmm. There’s nothing more worrying than a person who thinks they know how to time markets because they’ve done well so far.
At least you acknowledge that your success is partly luck. So next time you might strike bad luck. What would have happened, for example, if that clifftop house had slipped down the bank during a cyclone? And your insurance didn’t end up covering all of your loss, to say nothing of the hassle.
Also, if you hadn’t got into KiwiSaver until after the recovery from the Global Financial Crisis, your numbers wouldn’t look quite so good.
The vast majority of people – especially amateurs – who try to pick when to get in and out of the property, share or bond markets end up doing worse than those who simply get into the right investment for them and stay put.
Fortunately, though, you’re in a strong position. If things go wrong from now on, you can always switch to being like the vast majority of retired people, spending some or all of your savings. And I note the last word of your letter!
Q: Re last week’s question about whether it’s better to pay off your mortgage or invest in shares, I would add the following comment from a purely financial perspective: investment returns are typically related to risk – the higher the risk, the higher the expected return. However, in this case paying off your mortgage has zero risk and an after-tax return equal to the mortgage rate.
The average two-year mortgage rate over the last 20 years is 6.2%, according to the Reserve Bank. On the other hand, the long-term return on a globally diversified share fund, after fees and tax, is unlikely to be more than 7.5%. (It’s been about 7% over the last 20 years). Your net return is the difference between the two.
So the question I would ask is: “Would you borrow money to make an expected return of less than 1.5%, with all the risks and necessary investment horizon of the sharemarket?” Personally, I wouldn’t, the exception being KiwiSaver, assuming you are entitled to employer contributions.
Note – the last 10 years has been abnormal, with lower-than-average mortgage rates and higher-than-average sharemarket returns.
A: You’re quite right. That’s a good way to think about it.
While looking back there certainly have been times when share returns were considerably higher than mortgage rates, that’s not true on average over longer periods, as you point out. And we can’t know future trends.
Q: On mortgage versus shares, and mortgages versus rents, sure a mortgage is hard at first. However, as time goes on, that mortgage, comparatively, becomes a low amount to pay. Rents never do anything but go up.
And house values fluctuate – in the short term. But long term, never. Perhaps people should realise.
A: You make another good point. Over the first years of a mortgage you’re quite likely to find your payments increasing to a difficult level when interest rates rise. But if your loan is over, say, 25 or 30 years, not only does the balance decrease as you pay it off, but inflation reduces the burden of the debt.
Q: When I started work in 1978 I was encouraged to take out some life insurance. I remember the meeting with the salesman.
He said, “John, do you realise that you could earn up to $250,000 in your lifetime?” I was astonished, and I subsequently took out a policy for $25,000.
Today that $250,000 wouldn’t even buy a quarter of an average house, nor the $25,000 a reasonable car.
A: Your letter reminds me of all those times people say, “Back in (fill in a year several decades ago) I earned the princely sum (why is it always princely?) of (fill in some pathetically low amount).” Or “My house cost (fill in a really low number)”.
It doesn’t mean much, unless you use the inflation calculator on the Reserve Bank website to find the current equivalent.
Your numbers in the late 1970s lost their value particularly quickly. Most of the time from the mid-seventies to the late eighties, New Zealand inflation was between 10% and almost 19%. It makes the recent high of about 7% seem mild.
Q: Based on your chart last week, if one had, say, $400,000 invested in KiwiSaver in 2015, you would see a return of $920,000 – a clear financial winner over that period – no?
A: The graph you’re referring was accidentally left out of the paper version of last week’s column, although it was in the online version. It’s a pretty interesting graph, so we’re running it again.
It shows that:
Your numbers look about right if you invested in a highest-risk aggressive fund, but you wouldn’t get a return of $920,000, but a fund balance of $920,000 at the end of the period. Your return is the difference between the start and end values.
Q: I had the same dilemma as last week’s correspondent who was thinking about borrowing more than they need, just in case they can’t get a loan later on because they are getting older.
Your writer is correct to get any “just in case” finance sorted. Despite having assets, my bank treated me like a leper when I stopped being a slave to the weekly pay packet.
I’ve had a revolving credit account of $100,000 for about 10 years now and rarely, if ever, is it in debit (so no interest), but it’s nice to know the money’s available.
A: That’s shocking to know your bank treated you badly after you retired. It’s fair enough that they make adjustments for your lower income, but unpleasantness is certainly not warranted.
I asked our biggest five banks – ANZ, ASB, BNZ, Kiwibank and Westpac – how they handle retired people’s loans. BNZ didn’t reply by deadline, but the others all made several comments.
Westpac made a similar point to one I made last week, when I said, “I would far rather see you aiming to pay off your mortgage before you retire.”
Said Westpac: “Through our financial education programme, Managing Your Money, we encourage people planning for retirement to change their mindset from having a lending facility as a back-up to being in a position to self-fund their retirement. This could mean reviewing any physical assets that could release cash in the future; building savings; or considering their investment options like KiwiSaver to ensure their choice of fund and contribution level has them on track to reach their retirement goals.”
Other banks offer similar guidance.
Failing that, all the banks said they always assess a person’s ability to repay a loan, at any age.
From ASB: “This assessment takes a range of factors into account including income from all sources (including New Zealand Superannuation), fixed financial commitments, living expenses and proposed loan repayments.
“Where applicable, we give additional consideration to a borrower’s capacity to continue to meet loan repayments following expected retirement, including any alternative repayment sources such as sale of assets. We don’t have an upper age limit for borrowing with ASB.”
All the banks offer a revolving credit mortgage, like the one you have. These loans let you borrow any amount from zero to a set maximum at any time. In some cases, the maximum loan reduces over time.
At ANZ, “There is no trigger at retirement age to reduce any limits of revolving credit that the customer may have. If a customer has an established Flexi limit they can utilise that limit without further bank approval. However, any new lending facilities would require bank approval.”
At Kiwibank, “The borrowing limit may be reviewed, but it would depend on individual circumstances.”
ASB says its revolving credit products “provide borrowers with a range of options. For example, an Orbit Home Loan provides a credit limit which stays the same over the life of the loan. An Orbit FastTrack Home Loan has a credit limit which reduces regularly.“
It adds that the bank “regularly reviews the way our customers are using their Orbit Home Loan revolving credit, and we take actions to achieve good outcomes for our customers. This includes discussing their repayment strategy with them or offering alternatives if needed, on a case-by-case basis.”
Meanwhile, at Westpac, “If a customer has a revolving home loan, the limit will reduce to zero over the full term of the loan, unless they have applied for a small non-reducing period. That means their limit will not decrease for an agreed length of time, which may give them more flexibility in how they pay the loan for this period.”
Readers may want to check their bank’s policy – and perhaps ask another bank if it could do better for them, and then switch.
Several banks also said retired people could borrow through credit cards, personal loans or overdrafts without needing bank approval. But these charge considerably higher interest rates. I would hate to see a retired person – or anyone else for that matter – running up a long- or even medium-term loan this way.
Q: My husband and I are anticipating retiring within the next couple of years, and we have followed your advice over the years regarding making regular contributions to our KiwiSaver plans and riding out the volatility associated with our high-growth funds.
As we approach retirement I am now taking a harder look at our KiwiSaver funds and am considering a shift to a different provider. If I move from one high-growth fund to a different high-growth fund, offered by a different provider, am I locking in the losses the fund has recently experienced, or is it analogous to selling a house at a loss but buying another one in the same market.
BTW, we do not have all of our savings in high-growth funds, this is money that we will not be dipping into for 10 years or so.
Are there tax implications here?
A: Yes, it’s the same as selling and buying houses in the same market.
If you were moving from a high-growth fund to a lower-growth fund, that wouldn’t be wise when share prices are down. Then you would, indeed, be “locking in the losses”. But switching to a different provider while staying at the same risk level is fine regardless of what the markets are doing.
And there are no tax implications.
* 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.
Lawyer supports law change to avoid "draconian consequences" for lenders.