Our current situation is that we have stocks valued at $353,000 ($63,000 overseas), capital notes at $344,000, term deposits at $200,000 and call deposits at $25,000.
Our problem is that $160,000 of our term deposits mature soon. We would like to invest that amount and the call deposits in overseas shares, either through managed international funds and/or index funds Please advise.
A. My first reaction to your letter was: I admire your courage. But, given that you are in your 70s, you've probably got enough in shares already.
Most retired people don't want to put much of their life savings at risk of losing value.
On second thoughts, though, your allocation to shares depends on whether you expect to spend all your savings, or whether you are investing some with the idea of leaving it to your children or others.
Let's start out assuming that you plan to spend all your money over the next 15 years or so.
If you were following a recommended allocation for those in retirement, you would have:
* of your savings, or $185,000, in term deposits to spend over the next three years.
* of the money, or $430,000, in Government stock, bonds or capital notes to spend over the following seven years.
* of the money, or $307,000, in shares or share funds to spend after 2013.
Every year or two you would move some money, so that you always have roughly three years' worth in term deposits and about seven years' worth in bonds.
It's best if you never expect to spend the money you've invested in shares or share funds for at least 10 years. That gives you flexibility and prevents your being forced to sell in a down market.
All the money, especially the share money, should grow faster than inflation, which gives you a buffer against future unexpected spending - or against living longer than you expect.
If the above is the route you want to take, you will need to put about $40,000 of your term deposit money and about $46,000 of your share money into bonds.
That doesn't mean, though, that you give up on international shares. I think that at least half of anyone's share holdings should be overseas. You get much better diversification, which lowers your risk.
The simplest way to go offshore is via a New Zealand-based share fund. And, as you note, I recommend index funds, which charge lower fees and pay lower tax. A good sharebroker or financial adviser can tell you the options.
You could transfer, say, $200,000 of the $307,000 into one or several international index funds.
So far, we've set things up so that you spend all your savings, which would amount to $61,000 a year and rising, over and above NZ Super.
If you don't feel you need that much, and plan to leave money to others, draw up a plan similar to the above but involving just your spending money.
If $30,000 or so a year - plus NZ Super - sounds good, halve the amounts above. You can always raise the yearly spending later if you wish.
In the meantime, by all means put the excess into an international index fund. We'll assume you will live for 10 more years or that, if you both die before then, those who inherit the money won't be in a rush to cash it in.
As you get older, if that assumption starts to look iffy, transfer some to bonds or capital notes.
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THE CHALLENGE
A couple of weeks ago, this column included an extract from BNZ chief economist Tony Alexander's Weekly Overview.
He wrote about house price cycles, and how he bought a house a month before the 1987 share crash.
"I sold six years later for 3 per cent more than the purchase price, after adjusting for inflation, and along the way paid interest rates over 15 per cent," he said.
He then challenged people to send him stories showing how they got caught out in a downturn.
He got only two replies. Here's the first one:
In mid 1987, my husband and I sold some shares to boost the deposit we paid on a $385,000 house in St Heliers, Auckland. Blue-chip suburb, can't go wrong, right?
Wrong!
When the sharemarket crashed, we congratulated ourselves on our timing. We had no shares, lots of property.
A year later, we fell in love with a North Shore house and bought it, with a four-month settlement period to give us plenty of time to sell in St Heliers. We knew Auckland house prices had dropped, but we were buying and selling in the same market, so that seemed okay.
Several months later, we reluctantly sold in St Heliers for $265,000, 31 per cent less than we had paid.
I'm sure we got the North Shore house for less than it would have cost the year before, but not that much less. Different suburbs fared differently in that housing slump.
The one blessing was that we had kept the St Heliers mortgage low. Otherwise we could easily have owed the bank more than the house was worth.
Now it's confession time. I wrote that.
Before all you landlords who think I am anti-property leap up to say, "No wonder she writes what she does!", let me add that I have done very well with other properties.
One in Sydney almost doubled in value over two years. Of the eight houses I've owned in three countries, five grew very nicely thank you.
But there were three fizzers, including two in Auckland. And they all looked like great propositions when we bought them.
All Alexander and I are trying to say is that investing in houses has its downs as well as its ups. And now that inflation is lower, there will be more downs than there used to be.
What I want to know is: How come, out of Alexander's three stories, one was from him and one from me? Are we and one other person the only bad investors in houses? Or could it be that nobody else wants to confess, or that they can't bear to recall?
Here's the other story:
Although I have done well from properties bought (and still owned) in 1991, 1993 and 2001, I have a horror story about an investment property bought in 1992 that highlights what can go wrong when trying to manage a property at a distance.
In 1992 I bought a two-bedroom apartment in Korokoro, Wellington, for $58,000. I put down a deposit of $14,000 and borrowed the rest.
In 1993 I moved to Auckland and engaged a property management company to manage the property. In 1995 I decided to do a two-year volunteer contract in the Solomon Islands.
Three days before Christmas in 1995 I received a fax from the property management company in Wellington that the tenants had vacated the property owing eight weeks' rent, had stolen all the furnishings, had left the place in an absolute mess.
To cap things off, the company said they no longer wished to manage the property.
I fired back a fax and instructed them to find an alternative property manager for the property. They replied soon after stating that no one was interested in taking on such a low-yield property.
I had to either give up my volunteer contract and return to New Zealand and sort out the mess or to cut my losses and sell immediately.
I instructed the property management company to contact real estate agents to market the property.
Six weeks after I first received the fax, my property was passed in at auction but "snapped up" for $44,000 by the real estate agents who were supposed to be marketing the property.
Fortunately I was able to repay the mortgage, but in the process had lost my total deposit.
The experience did not put me off property investment but made me cautious.
Discounting that disaster, over 12 years I have invested a total of $75,000 in residential property and at present have about $430,000 in equity in properties valued at $700,000.
Moreover, two months ago I was able to utilise equity in properties in New Zealand and put down a 30 per cent deposit on a property bought in Vanuatu (where I now live).
This property is currently rented. The rents from properties in Vanuatu and New Zealand easily cover all mortgage payments, insurance, rates and miscellaneous outgoings.
Given that I am on a modest wage ($50,000 a year) and have a family to support on one income, I am pleased I took a punt on property investment.
It has given me a level of financial security that otherwise would not have been possible given my salary.
I have no intention of buying again during the current cycle in New Zealand.
Instead I will focus on paying off the mortgage in Vanuatu (projected four years).
A happy ending for all you property lovers.
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