COMMENT:

I have finally bought my first piece of real estate — an apartment off the plans, for $870,000, and I move in in March.

I have always rented and, after saving for many years, have a good deposit — $420,000. I am 48, single and have no dependants.

I have been pondering if I should include my KiwiSaver (current balance $83,000) with my deposit to reduce the life of the mortgage and interest payments, or keep it so I have these funds available when I retire.

My plan is to go with a 20-year mortgage. I earn $90,000. I contribute 3 per cent to KiwiSaver and have made voluntary payments. If I haven't paid off the mortgage by retirement I could use my KiwiSaver funds for this purpose.

Personally, I would like to hold on to KiwiSaver as it has done well and I expect it will continue to grow.

But you are constantly saying to attack the mortgage, so I am struggling to get my head around the best course of action to take.

Do you think I should attack the mortgage or keep my KiwiSaver in my back pocket for when I retire?

First, congratulations on becoming a home owner. You're an inspiration to others to keep saving and you will get there.

Your best course of action depends on what will happen to KiwiSaver returns and mortgage interest rates.

Here's one way to look at it: if the future returns on your KiwiSaver account — after fees and tax — are higher than the mortgage interest rate you're paying, you will be better off in KiwiSaver. If not, putting that money into the mortgage would have been better.

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Trouble is, there's no way of knowing what future returns and mortgage rates will be.

It's not surprising that you're happy with how well your KiwiSaver account has done in recent years. Nearly everyone's account has grown nicely in unusually strong and steady markets.

But that won't necessarily continue. If your balance goes down, you might feel a bit sick as you continue to pay off a higher mortgage than necessary.

I'm not saying that will happen over a long period. In almost all cases, a KiwiSaver account will grow over 20 years. But if you're in a balanced, growth or aggressive fund — the higher-risk ones — you can be pretty certain there will be some substantial drops within a couple of decades.

It's also likely your mortgage interest rate will rise at some point.

Because of this uncertainty, if I were you, I would put my KiwiSaver money into my deposit. But if that really goes against the grain, do it with just half the money and leave the rest where it is. In the end it probably won't make that much difference.

And by all means keep contributing 3 per cent to KiwiSaver. It will grow again.

Another thought: if you use KiwiSaver to boost your deposit, your mortgage will be smaller, so the repayments on a 20-year loan will be lower. So how about reducing the term of the mortgage?

Pay rise dilemma

I'm starting a new job shortly and will receive a slight pay increase. I'm in my early 40s and I've regularly contributed 3 per cent into my KiwiSaver, which is split between a high-risk and moderate-risk fund.

On my mortgage, I'm paying 4.49 per cent interest and paying more than the minimum fortnightly payments. The mortgage is due to be paid off in 10 years.

I'm wondering whether I take advantage of this change in salary to increase my KiwiSaver contribution to either 4 per cent or 8 per cent, or increase my mortgage payments by this amount to reduce the term even further?

I thought it best to make these changes now before I get used to the extra amount in my pay.

Good on you for taking the chance to either save more or repay debt when you get a pay rise. It's a great opportunity to grow your wealth painlessly.

Yours is basically the same issue as in the previous Q&A, just dressed up in different clothing. And, again, I favour getting that mortgage down.

Reducing debt improves your wealth in the same way as an investment does. In your case, whacking back the mortgage is equal to having a risk-free investment that pays you 4.49 per cent after fees and tax.

That's a pretty good deal. You might get that return in KiwiSaver, but not without risk.
And once you've paid the mortgage off, you can get into seriously boosting your KiwiSaver account.

By the way, if you or any other reader wants to increase your KiwiSaver contributions above 3 per cent of your pay, you don't have to stick with either 4 or 8 per cent.

You can increase contributions by any amount by paying the money directly to your provider. You could, for instance, set up a regular transfer from your bank account to the provider.

Healthy outlook

Thanks for your new book Rich Enough. I enjoyed reading it in the lead-up to Christmas and discussing it with my family. I enjoyed it so much that I bought a second copy as a gift for my mother-in-law.

There was one point I disagreed with you on, however, and that was your comment about health insurance. My husband and I are medical specialists and I believe the public health system in New Zealand is pretty excellent.

Health insurance is by no means a necessity in order to stay healthy in New Zealand, and in my opinion it's not worth making financial sacrifices to buy it.

I think it's a bit of a mistake to think of private healthcare as "better". Private hospitals might be flasher, but in most cases public hospitals are actually safer if you are sick or high risk (they have facilities that many private hospitals do not, such as intensive care units and blood banks).

Care may be provided quicker in private for non-life-threatening problems, and the threshold for intervention may be lower (not necessarily a good thing), but in the end, if you really need medical treatment, it will be provided in the public system. There is a very good fallback option which, to my mind, makes health insurance a luxury rather than a necessity.

I personally believe adopting a healthy lifestyle, and becoming knowledgeable about your own health and being prepared to advocate strongly for yourself in the public health system, are far more effective ways to ensure good health than buying health insurance.

Thanks again for your fabulous book.

And thanks for your kind comments about the book.

I agree with a lot that you say about the public health system. I've heard many people sing its praises, despite the occasional high-profile criticism.

But although you acknowledge that "care may be provided quicker in private for non-life-threatening problems", I don't think you're giving that enough weight.

Crook hips and knees don't kill people, but those who have surgery on them often say that it's life-changing.

It's usually older people who have these problems — the very people who face big increases in health insurance premiums as each year passes. But that's exactly why they have to pay more.

To keep premiums somewhat lower, it's often a good idea to get health insurance only for surgery and perhaps specialists, not for GP visits unless you have lots of health problems. But if you can afford health insurance, I don't recommend dropping it.

It's miserable enough being in pain when you walk, without having to wait many months for relief.

Where's the value?

Why has NZX any value? Shares have. Stockbrokers have. NZX seems to be just a place where you can find shares. What intrinsic value does the NZX contribute?

It's a bit of a confusing situation. But NZX is actually just another company that is listed on the stock exchange.

Its main business happens to be running the country's share and debt exchanges, and providing services that go with that. It also offers investment products through Smartshares and SuperLife.

Just like other listed companies, it pays dividends to shareholders who also hope to make gains when they sell their shares.

NZX wasn't always a listed company. Up until 2002, the stock exchange was owned by its member firms, but they voted for demutualisation that year.

Then, in June 2003, New Zealand Exchange Limited, trading as NZX, listed its own securities on its main sharemarket.

Number crunching

Late last year you had quite a few correspondents writing about retirement and NZ Superannuation and their concerns about whether it will be enough and how much extra they could need.

I have been retired for 22 years so have the advantage of hindsight. I've experienced the increases in NZ Superannuation and the increases in costs over that period.

In 2000, NZ Superannuation, for a married couple on the "S" tax rate, was $15,789 a year.

In 2019, it is $30,109, an increase of 91 per cent.

In 2000, some of the major costs — rates, and insurance for house, contents, car and health for one person — were $2963. In 2019, it is $6824, an increase of 130 per cent.

We are in the same house, using the same insurance companies and driving the same car so the figures are all relevant.

This indicates the longer one is in retirement, the greater the divergence between income from NZ Superannuation and household costs.

That doesn't seem to be correct for most people — at least for the period since 2008. From then, NZ Super has risen faster than superannuitants' living costs.

Stats NZ started keeping track specifically of inflation for people over 65 in 2008, in what it calls the household living-costs price index for superannuitants.

The index includes the costs of the same items as in the general price index for all households. But it puts considerably more weight on spending on health, rates, communication, recreation, culture, household contents and electricity, and considerably less on education, rents, tobacco and petrol.

The reasoning behind most of this is pretty obvious when you think about it. I wonder if the lower weight on tobacco reflects the fact users of tobacco are less likely to live into retirement!

Anyway, the index for superannuitants grew 24 per cent from June 2008 to September 2018, while for all households it grew 18 per cent. That seems worrying for retirees, but read on.

While I couldn't find NZ Super rates in 2008, since April 2009, payments to singles living alone have grown 27 per cent, and for couples 28 per cent. Superannuitants have kept ahead of the game.

As the New Zealand Initiative said recently: "Poverty rates for the elderly are low. The material hardship rate for superannuitants is 3 per cent, compared with 11 per cent for the whole population."

Why the difference between your findings and mine?

It's possible living costs grew more than NZ Super between 2000 and 2008/9 and then the trend reversed. But that seems unlikely.

Perhaps the costs you mention are the ones that stick in your mind because they have risen fastest. You don't mention food, for example, and yet that makes up more than 20 per cent of the superannuitants' price index.

- 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.