By MARY HOLM
Q. Much of your correspondence seems to be from people who are, from my perspective, in the prime of financial life.
I wonder if you can advise a couple of apparently unemployable wrinklies whose current cashflow doesn't pay the bills.
We will be 65 before the year's end. We have investments of about $100,000 (having shared the universal thrashing handed to investors in managed funds) and a freehold lifestyle property with a market value of about $400,000.
Two of our investments yield regular but small returns from property funds.
The bulk of the investment is in a managed fund, and because we lost about $35,000 there we're reluctant to crystallise our losses by withdrawing, particularly as it has lately shown its first gains since 2000.
We have no attachment to the property and would sell. If we did, and bought a home for, say, $300,000, how would we sensibly deploy the balance? We're not averse to risk but we need a cashflow.
A. You're the classic asset-rich, cash-poor couple. If you're happy enough to trade down to a cheaper property, you might as well do so.
We could debate until the cows come home - if you've got any on your land - whether now or later is the best time to sell one property and buy another.
Everything else being equal, when prices rise the gap between a more expensive property and a cheaper one is more likely to increase than decrease.
But everything else is never equal. Putting your life on hold so you can try to time markets is, I think, letting the tail wag the dog. And often things don't work out as predicted.
If I were you, I would put your lifestyle block on the market now, but ask a fairly high price for it. You're in no rush to sell, so go for top dollar. Property sellers these days are often surprised at what they can get.
By the same token, check out what $300,000 buys you now. You don't want to be unpleasantly surprised on that side of the deal.
I would plan to spend the proceeds of the property transactions over the next 10 years, and the managed fund money over the following 10 to 15 years.
Here's my suggestion for the property money:
* Put $10,000 in term deposits as an emergency fund.
* Put 30 per cent of the rest into term deposits maturing over the next three years. As the money matures, it's yours to spend.
* Put the remaining 70 per cent in high-quality bonds. To the extent you can, plan it so that about one-seventh of the money matures each year.
When the bonds mature, transfer that money into term deposits, so you always have roughly the next three years' cash in the bank.
This allocation may seem simplistic. Your money will be earning interest, so you will have more each year than the year before.
After inflation, though, the difference won't be all that big. And it's comforting to know your income will probably rise a bit faster than inflation.
Now let's look at your managed fund money. I think you should discuss your particular investments with a different adviser from anyone you have dealt with so far.
If the fees on your current funds are higher than on alternatives, and if your funds are paying tax on capital gains, you will probably be better off elsewhere.
While I agree you don't want to withdraw now from this type of investment, you could transfer your money to another fund with a similar mix of investments.
As long as you stick with much the same type of assets, it doesn't matter whether the market is high or low.
Look hard at your property funds, too. Many such funds invest in just one or a few similar properties. If that type of property does badly, you could lose. Property fund fees can be pretty high, too.
If the new adviser comes up with cheaper managed fund alternatives, consider moving your money to those.
Once you have done that, plan to move a portion every year or two into corporate bonds, in much the same way as you move the bond money into term deposits.
The idea is, throughout retirement, to always have roughly the next three years' money in term deposits, the following seven years in bonds, and longer term money in shares or a share fund.
Despite the trends of the past few years, I still think shares are the best long-term bet. As you say, they have done better lately. But you don't want money you will spend soon to be in shares. There's too big a chance you will be forced to sell when they have just plunged.
* * *
Q. We are near retirement. My husband will be 65 next year and I have nearly five years to go (thank goodness!)
We have about $700,000 invested with the bank in term deposits, with a mortgage-free home. As the rate the bank pays is not a lot, we have been looking at alternatives.
I was interested in your comments in last Saturday's paper about investing in A-rated corporate bonds. Can you please advise which ones you would recommend?
A. You might well be asking the same question after reading the above Q&A, so perhaps it's time I answered it.
But first, an aside: Many people in their 60s should consider putting some of the money they don't plan to spend for 10 or 15 years into shares or a share fund. It will almost certainly grow faster than in fixed interest over that time frame.
Clearly, though, you are conservative investors. I'm guessing you don't want the volatility of share or property investments.
Fair enough. We'll stick with fixed interest - and confine ourselves to conservative fixed interest, such as highly rated bonds.
Which ones do I recommend? I'm not in a position to name specific issues. But I can give you some guidelines for the conservative bond investor:
* Stick with investment-grade bonds which have a credit rating of BBB minus or above.
If you want to be even safer, go with AA minus or better. You're then looking at Government stock, local authorities, Government-owned entities such as Transpower, and the banks, which issue bonds as well as offering term deposits.
* To keep it simple, choose bonds as opposed to capital notes. With the latter, you might end up with shares rather than money at maturity. And capital notes rank behind bonds if the company fails, so they are less secure.
* Plan to hold until maturity. You can sell earlier, which can be an advantage over term deposits in an emergency.
And, depending on what has happened to interest rates in the meantime, you might sell at a gain. But you also might sell at a loss.
If you hold to maturity, your return is exactly what you were told when you bought.
* You can buy either newly issued bonds from the government body or company that is raising money, or bonds that have been around for a while, which you buy from an investor who wants to get their money out.
Generally you will get a better deal with a new issue. The issuer wants to attract many buyers in a short period, so the interest rate is often slightly higher than if you buy an existing bond.
Also, the issuer pays the brokerage, which otherwise you would pay.
One problem with A-rated bonds is that, sometimes, they don't pay a higher return than term deposits, especially if you pay brokerage on the bonds.
To get a better return, you might want to go for something with a slightly lower rating. For example, BBB-minus-rated Mighty River Power, which the Government owns, has bonds maturing in 2008 that are paying 6.63 per cent after brokerage.
With anything less than AAA-rate Government stock, though, there's always the possibility of default - remote though it may be. To avoid disaster, spread your money over several bonds, with less in the lower-rated ones.
I hope all of this isn't leaving you feeling bewildered. Financial advisers and stockbrokers can help you find bond investments that suit you.
Ask them to let you know about new issues. An example is NGC (Natural Gas Corp) Holdings, which is issuing five-year bonds this year that are expected to get an A-minus rating.
A good source of info on bonds that have already been issued is www.interest.co.nz. Click on "Money Market".
* * *
Q. As a financial dummy, I have followed your column with great interest since its inception. At the end of this year my wife and I qualify for NZ Super. We have $84,000 in term deposits and $214,000 in a retirement/superannuation fund. How can we invest this money to obtain a return of $1000 after tax a month?
A. I don't like this dummy talk - especially if you've been reading the column all these years! In any case, you've accumulated a bigger retirement nest egg than many. Well done.
Your savings total close to $300,000 and, with just a little bit of luck, will have topped that by the end of the year.
If your only income will be NZ Super and earnings on your savings, you will be in the 21 per cent tax bracket (taxable income of $9500 to $38,000) when you retire.
To get $12,000 a year after tax, then, you'll need to receive about $15,200 before tax. That's a return of 5.1 per cent on $300,000. And you're in luck. You can get a little more than that on the most secure investment around, Government stock, with maturity dates ranging from February 2005 to April 2015.
You can also get more than 5.1 per cent on some bank term deposits, but you can't tie up your money for so long. When a term deposit matures, you might find interest rates have fallen. So Government stock is a safer bet for you.
You can buy Government stock from a stockbroker. While there, you might want to discuss other slightly riskier fixed interest investments at somewhat higher interest rates, as outlined above.
You are apparently happy with $1000 a month, but you might enjoy a bit more - especially over the years when inflation starts to eat into your income.
* * *
Email us your question about money
Or post it to:
Money Matters
Business Herald
PO Box 32, Auckland
