Smart investing the key to future stability

Spending precious leisure time devising financial plans and swotting up on investments may not be an enticing prospect for many middle-aged New Zealanders. This is the generation that learned Marxist economic theory while taking state-funded university degrees, protested against war and apartheid and tried communal living in Israel. Big business was out and high ideals were in.

But when economist and investment adviser Dr Gareth Morgan tells you, via his latest book, Pension Panic, that you ignore your finances at your peril and must take responsibility for yourself, you might sit up and take notice.

Morgan was already a household name for his work as an economist and investment adviser before his son Sam sold his business Trade Me earlier this year for $700 million. Dad, Gareth, had helped Sam with start-up finance and made $47 million from the deal. Know-how with money is clearly in the genes. When dispensing advice to the babyboomer generation it also helps that Morgan is one of them, having been born in 1953.

He is also living a life that many boomers aspire to. By the time you read this, Morgan will be en route to Korea for the latest in a series of motorcycle tours. He raises money for charity through sponsorship, takes his laptop and works as he goes; Pension Panic was written during his last trip, to the United States.

Morgan has organised his life so that, at 53, he does not need to panic about his pension, a fact confirmed by his decision to contribute his share of the Trade Me profits to charity.

"I am well off enough from my own business. I didn't invest in Trade Me to make a heap of money. I did it to help Sam out."

When the Trade Me deal was done, he says, he and wife Jo asked themselves "do we need this?".

"The kids don't need it. Obviously, Sam doesn't. We will make sure no-one is on the breadline (but) they have had their inheritance, which is their education. We have paid their fees, as long as they have performed."

His family, it seems, has been largely unaffected by the Trade Me lotto. "(The) family is pretty much the same as it was - all trying to just live our lives as we have been. Money wasn't and isn't the driver of behaviour - I guess that's the main revelation that winning lotto brought home!"

For people who do need to panic about their pensions, re-thinking traditional ideas about inheritance is one of the key pieces of advice in Morgan's book. The idea that money should be conserved and passed on to the next generation made sense when productive assets, such as farms, were involved. "These days the biggest asset someone has is their human capital," Morgan says. "The biggest thing you can do for your kids is get them well educated."

The financial guru's decision to hand his Trade Me windfall over to charity also confirms another one of his firmly held beliefs; that earning more to spend more does not make sense. Before setting yourself impossible saving goals, consider how much you will really need to live on.

His indulgence is his motorcycling, he says, but he has not changed his car or house in more than a decade.

"If you spend your whole life gearing spending to your income you are just a sucker."

Governments and social commentators are promoting the idea that babyboomers will re-write economic history books by choosing to work for longer than their forebears.

Morgan acknowledges that he loves his work and that many of his contemporaries do not.

"Something that annoys me is the assumption that everyone works until 65.

The reality is that work is a hell of a lot more enjoyable if you don't have to do it."

"Working until you drop is not the point of life at all. If you can get to the position where you work only because you enjoy doing it, man, you can enjoy it."

The point of Pension Panic, he says, is to tell people how they can get to that enviable position. "If you don't get with it, you will be working until you are 65, and not through choice."

MORGAN OFFERS THE FOLLOWING ADVICE:

* What we should be panicking about

Morgan acknowledges that by some official measures New Zealanders are saving less than they used to but this does not mean they are not building assets. He points to research in 2003 led by economist Grant Scobie, based on Government data, which indicated that people were better prepared for retirement than some of the isolated statistics suggest.

* The question, he says, is what is wealth and can you call it up?

"There is a lot of misinformation. A lot of people are saving but in forms that aren't measured properly. People with equity in a company or house are [saving]."

Worldwide, governments are worried about the strain that the post-World War II generation will put on state pension resources.

Individuals need to take control of their own finances so they do not get caught up in panic, or caught out by inactivity. Relying solely on New Zealand Superannuation, currently $13,700 for a single person and $21,200 for a couple, will be fine for those content to warm their hands in mittens and eat Milk Arrowroots, says Morgan.

"What I am trying to say is be prepared rather than panic."

* What we are doing wrong?

The problem for many people is not that they aren't building assets but that they don't have a strategy and have too much money tied up in the wrong places. They also need to do more to ensure that their returns are not eaten up by investment management charges and mediocre managers.

"Every time you make a mistake you have to look at it in terms of the number of extra years you have to work."

In his book he says: "Count on the Government to prop you up in your dotage but don't count solely on the Government. Make a concerted effort to pay off your home and perhaps buy investment properties too, but don't base your whole retirement strategy upon your property portfolio. Give some of your savings to a fund manager, but not all of them."

* The perils of too much property

Middle-aged New Zealanders have too much money tied up in property. It won't be a store of value because we will all be selling at the same time.

Some landlords may be stuck with properties they can't unload, while trading down from the family home may not work because small properties will become too expensive.

* Equity release

Reverse mortgages and similar schemes designed to release equity through borrowing have the potential to cause problems because long-term interest rates in New Zealand are high. Most of the financial methods of equity release are dangerous in New Zealand conditions.

* KiwiSaver

Morgan describes the Government decision to launch the KiwiSaver workplace-based savings scheme as "curious" given that there is doubt about the inadequacy of retirement assets. He also wonders about the "rapacious" investment industry's ability to achieve decent returns on KiwiSaver funds. The industry needs a major overhaul to ensure that it offers value-for-money to investors.

* Managing your money

Simply boosting our savings is not going to guarantee a happy, stress-free and well-provided-for retirement for all, Morgan argues in the book.

"If you look at the poor financial position of many of today's retirees, the problem is not that they didn't save enough, it's more that the investment of those savings was very poorly done - with the benefit of hindsight of course," he says.

"Since any investment bears risk, the most prudent way to manage your wealth is to spread it across the universe of investment avenues in a cost effective manner."

People with existing investments may improve their returns by switching to better managers. You need a "critical mass" of money to start diversifying; Morgan's own investment management service has a minimum of $50,000. Until you get there, the bank is probably the best place to save.

After that, the keys are diversification and, for those who do not want to do it themselves, finding a competent manager. Morgan admits that this is easier said than done, given - as he sees it - the poor quality of management advice available. He warns: "Professional advisers are hired hands to help; nothing more. Hand your money over to a professional to take care of it, trusting you'll never have to think about it again, and you'll likely wake up one day gutted."