COMMENT:

One great advantage for last week's reader who doesn't know whether to sell now or later — in order to move into a bigger home after the baby comes — is that if they sell now they will be a cash buyer.

That's necessary to bid at an auction and gives you great bargaining power when competing against those in a "chain".

Friends recently had huge interest in their house but no bids at auction because all of the potential bidders had a house to sell, so they were in a chain and couldn't make an unconditional offer.

When several buyers are making an offer (in a non-auction situation), the cash buyer may have an advantage in that the seller may accept a lower price for the convenience of being able to close the sale and move fast on to their next project. Once again, cash is king.

You're probably right. In the present Auckland market, especially, I expect quite a few sellers are worried that prices might fall and may be more open to somewhat disappointing cash offers than in the recent past.

Of course, our couple doesn't plan to buy again for a year or two — after saving so they can buy a bigger place. And who knows what the housing market will be like then?

Still, in any market it never hurts to have cash on hand. More advice for our couple next week.

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No need to panic

We hope you can help us. We are both 70 and retired three years ago.

We own our home, have some term deposit savings and, without living extravagantly, we can pay our way. We both have KiwiSaver accounts with ASB Bank in a conservative fund.

So far we haven't had to cash in KiwiSaver, but possibly in one or two years we will, and based on the way that balances are reducing at present, we're wondering if there will be any cash left when we need it.

We understand the market fluctuations, but we don't have years in front of us to ride the highs and lows. If we do cash in our accounts, can you suggest what we should do with it so that it's working for us?

Are we panicking unnecessarily?

Your fund has had a few wobbles in the past couple of months, as well as earlier this year, as our graph shows. But there's definitely no cause for panic.

Let's look at the investments in ASB's conservative KiwiSaver fund. About 56 per cent of the money is in bonds, 23 per cent in cash (like short-term bank deposits) and 20 per cent in shares.

Most people know that the value of shares fluctuates. But with only a fifth of the money in shares, investors aren't seriously exposed to sharemarket wobbles — although a crash would certainly have an effect.

What many people don't realise, though, is that the value of bonds also fluctuates.

Bonds are a bit like term deposits. You invest a certain amount, receive interest, and normally get your money back at the end of the term. But unlike term deposits, bonds can be sold on the market part way through their term.

They are issued by central and local governments and companies. The riskier the bond — in other words, the more likely you won't get your money back at the end — the higher the interest. Riskier bond issuers have to pay high interest or nobody would invest with them.

There are two possible reasons the value of bonds in a fund will sometimes fall:

• Some of the bonds default and the fund doesn't get its money back.
• Interest rates rise.

A fund like the one you're in doesn't invest in risky bonds, so defaults are unlikely. If you look at "Check your current fund" on the KiwiSaver Fund Finder at sorted.org.nz, you'll see the ASB KiwiSaver Conservative Fund's biggest bond investments, (called "fixed interest" on that site), are issued by the NZ Government.

And ASB info shows the only other bonds that make up more than 1 per cent of the fund are NZ local government bonds.

But no fund that invests in bonds is immune from the effect of interest rate rises. If rates are higher on newly-issued bonds, the older ones are less appealing, so their market value falls.

Even if the fund manager doesn't sell its older bonds, it has to reduce their value in the fund to reflect what's happened in the markets.

On the other hand, if interest rates on new bonds are lower, the value of older bonds will rise.

So where are we? With more than three-quarters of your fund in shares or bonds, the value will often dip, sometimes drop and occasionally fall considerably more than it has lately.

But the graph shows that the path is upwards most of the time.

Indeed, despite the recent wobbles, over the year ending October 31, the return on your fund was just over 2 per cent after fees and tax, says ASB.

Looking over longer periods — a much more valid way of judging a fund's performance — the five-year return was more than 4.1 per cent a year, and the 10-year return was more than 4.4 per cent a year.

The Fund Finder does tell us, though, that back in April 2008 to March 2009 — in the midst of the global financial crisis — the fund did have a negative annual return, of minus 1.04 per cent after fees and tax.

The average for KiwiSaver conservative funds that year was minus 0.95 per cent, so it was a bad year for all.

Those are the sorts of returns we would expect from a conservative fund — a long-term average of 3 or 4 per cent with the occasional down year — although not seriously down.

The dips and drops don't make it an ideal place for money you expect to spend within the next year or two or three.

I recommend putting that money in either a cash fund — in or out of KiwiSaver — or bank term deposits. That way you can be confident the value won't drop right before you withdraw money.

If you think you'll spend only part of the money within the next three years, I suggest you leave the rest in your current fund in the meantime.

Its average return is likely to be higher than in a cash fund or deposits. Every now and then — perhaps yearly — move a bit more money so you always have the "within three years" money in a low-risk account.

Savings protection

Can I buy a more expensive house to prevent the Government taking my savings if care is needed for one of us?

The short answer is yes.

You're referring to the residential care subsidy the Government gives to a hospital or rest home to help pay for long-term care for someone over 65.

As I said last week, to qualify for the subsidy, you have to have assets below a certain amount.

If you have more assets, you pay for your own care until you've used up enough of your own money to reach one of the asset thresholds.

If you're single or have a partner in care, the total value of your assets must be $227,125 or less to get the subsidy.

If you have a partner who is not in care, the total value must be less than:

• $124,379, excluding the value of your house and car.
• $227,125, including the value of your house and car.

For more on this, see tinyurl.com/NZResCare.

A couple who own a home will always choose the first option. And you're suggesting that you put some of your savings into buying a flasher home.

"Generally, we have no issue with people spending their own assets on themselves regardless of whether the residential care subsidy is current or not," says George Van Ooyen, group general manager client service support at the Ministry of Social Development.

"Under the current rules, there is generally no objection to a couple using their own assets to buy a (more expensive) home to live in.

"If the home is purchased or upgraded before one partner enters care, and the other partner remains living there, then the home (regardless of value) is exempt under the $124,379 threshold."

What if one of the couple is already getting the subsidy when the home is bought or upgraded?

"Then the couple are required to tell us about their change in circumstances and we will review the couple's income situation, and the home will be exempt," says Van Ooyen.

"If the partner who was living in the property subsequently dies or enters care themselves, the first person in care has a full review of their entitlement, assets and income."

This happens regardless of whether their home had earlier been upgraded or a more expensive home purchased.

"Continued entitlement to financial assistance for rest home fees will be determined by many factors — how the property was owned, how the estate is settled (if applicable), other assets, etc," he says.

So it seems you could go ahead with your plan. And it does have some clear advantages.

You will be living in a nicer place and, if one of you goes into long-term care, your heirs will get more.

However, you might end up with not enough cash to enjoy your retirement as much as you could. And it's important to remember that many people don't ever need long-term care.

At the risk of offending you, presenting the situation as the Government taking your savings is just one way of looking at it. Another is that wealthier people should pay their own way, leaving the Government with more money to help, say, children in poverty.

Village people

The couple looking to sell their house and rent in retirement should consider moving to a retirement village.

They would use their capital to buy an occupation right agreement (ORA), which gives them a right to live in their unit for the rest of their lives or until they need care.

On exit they/their estate is repaid the amount they paid, less fees (which may be 30 per cent of the capital).

But it would give them much more security of tenure than renting, and it would preserve some of their capital.

Capital of $300,000 to $400,000 would probably not buy them a unit in Auckland, but there would be options in the regions, particularly from charitable operators. They can check tinyurl.com/NZRetVillages or Trade Me to see what is available.

Residents also have to pay weekly fees to live in a village (but not rates or house insurance), and some operators have these fees fixed for life, which provides certainty over outgoings.

Other advantages of retirement villages are reduced maintenance, lawn mowing and gardening, increased security, and companionship, as they are little communities and often have a hall where there may be clubs and activities.

The Commission for Financial Capability also has good information about retirement villages at cffc.org.nz.

You make another really good point. I love how readers see things from different perspectives, and bother to write to tell us all. Thank you.

Retirement villages are not everyone's cup of tea, but I know many people enjoy living in one.

By the way, some retirement villages or similar operate differently from the way you describe. The two websites you mention have more information on the various options.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.