NZ Herald 10 December 2022

AWow! You’ve hit the jackpot. But you are wise to seek help. There are too many stories of people who are suddenly rich and soon become not so rich.

Definitely buy a house with cash. With mortgages at their current rates, it’s great not to have to repay a loan.

You will be in a really strong position to negotiate a house purchase. House sellers don’t get many nibbles these days, and when they do it’s often from people willing to buy only if they can sell their current home for a certain price. A cash offer from you will be very appealing. So if I were you, I would offer considerably less than the seller’s asking price.

And you don’t necessarily need a modest home. You’ve got enough to buy something pretty flash if you would enjoy that.

What should you do with the rest of the money? That depends on your age, your sources of income, how well you can cope with market volatility…. all sorts of things.

I suggest you put some time into finding a financial adviser you feel comfortable with. Look for someone who charges you fees and receives no income from other sources. You don’t want them recommending investments because they receive commissions or other incentives.

Visit several and talk to them. You are interviewing them for the job of working for you.

For more on how to choose a good financial adviser, see an article on my website, at maryholm.com/advisers. It includes a link to a list of advisers who charge fees only.

AThese days leaving the money in the bank is not nearly as worrying as it was a year or so ago. You can get pretty good returns on bank term deposits now.

But you might as well get even bigger returns over the long term by investing in managed funds of some sort.

A good adviser can help you invest, and also explain it to you in simple terms. It doesn’t need to be at all complicated — honestly! See above for some tips on how to find one.

ANo, you haven’t missed the point. But some KiwiSaver providers have.

You’re doing what I and others recommend for retired people — putting the money you plan to spend in the short term in a low-risk fund, and the longer-term money in one or more higher-risk funds.

But for that to work, you have to be able to withdraw from just one fund. I asked the big KiwiSaver providers whether they let you do that — as opposed to withdrawing from all your funds at once.

The following said yes: ASB, Booster, Generate, Milford, SuperLife, and Westpac. The ones that said no are: ANZ, ANZ Default, Kiwi Wealth and OneAnswer. Mercer doesn’t currently permit it, but will do so from early next year. Providers who didn’t reply are AMP, BNZ, Fisher Funds and Fisher Two.

Simplicity doesn’t let members be in more than one fund in the first place. “We get asked for it maybe ten times a year, but keep it simple and low cost,” says managing director Sam Stubbs.

But hang on a minute. You’re with ASB, and you were told you couldn’t withdraw from just one fund. But they said “Yes” to me.

Says an ASB spokesperson, “A customer over 65 with investments in more than one ASB KiwiSaver Scheme Fund is able to withdraw from one specified fund. This isn’t a common scenario but is something we can action if requested.

“We’re sorry your reader is having difficulty and would be happy to connect her with a member of our team to assist with her withdrawal.” Perhaps show them this Q&A.

Other solutions: Switch to a provider who does offer this service. This should be easy. Just ask the new provider to move you. Or you could move your money to several non-KiwiSaver funds offered by your current provider and then withdraw from just one fund. But the fees will probably be higher than in KiwiSaver.

In a recent report, the Retirement Commission, Te Ara Ahunga Ora, said, “KiwiSaver providers should recognise the post-65 use of KiwiSaver and ensure their products have been adapted for the decumulation (drawdown) phase, as well as in the accumulation phase.”

I reckon this should include the ability for retired people in more than one fund to withdraw money from just one fund.

Footnote: I’m sure some smaller KiwiSaver providers also offer this service. If that’s you, let me know, and I will run a list next week. Many small providers are newer, and they offer low fees and good services.

AWhenever you are weighing up paying extra off a mortgage or investing the money, you need to compare:

• The interest rate on the mortgage.
• The expected return on the investment, after fees and tax.

If the mortgage rate is higher, you are better off paying down the mortgage. Getting rid of, say, a 6 per cent debt improves your wealth in the same way as earning a net 6 per cent in an investment.

The trouble is that you can’t predict the investment return — unless you’re in bank term deposits, which will always be lower than interest rates on new mortgages. On ETFs, who knows?

In this situation, usually I recommend paying down the mortgage. It’s like a risk-free investment, and puts you in a strong financial position in case you lose your job or a financial crisis befalls you.

In recent years, with mortgage interest rates exceptionally low, the case hasn’t been as clear cut. But now that rates have risen, I think motoring into the mortgage is a winner again.

Having said that, you might want to continue regularly putting a little into an ETF. That gives you diversification, and you learn about markets. I would favour an international fund rather than a US one — to give you even more diversification. Any single share market, including the US, sometimes performs worse than elsewhere.

AThis is the same issue as above, except that you are comparing paying down a mortgage with an investment you already have.

And it’s complicated by the reduction in your company’s contribution to your retirement savings. To keep it simple, we’ll say you earn $100,000. So the reduction in the company contribution would total $1,000 a year — or $670 after tax.

The basic question is: If you keep the super scheme going, is it likely to earn an annual return of more than the mortgage rate — say 6.5 per cent — after fees and tax? It might if you are fully invested in shares and perhaps property. But it might not. And if your investments are lower risk, it almost certainly won’t.

Even if you add the extra $670 company contribution into the mix, that effectively adds just 0.13 per cent to your return on $500,000.

If I were you, I would use the super money to pay down the mortgage.

What’s more, I suggest you stick to your old mortgage payments to get rid of the mortgage quickly. And if your own super contributions are also reduced, put that extra money into the mortgage too. It’s great to enter retirement mortgage-free.

ANormally I don’t recommend selling managed fund investments when they are down — and certainly not because you can’t cope with the downturn. But your situation is different.

The question for you — again similar to the above two Q&As — is whether you will earn more in the managed funds over the next year, after fees and tax, than the mortgage rate you will pay.

And just as above, the answer is that nobody knows.

But you would be withdrawing only a portion of your fund money, so I would be inclined to do that, and pay off the mortgages. If the markets roar ahead, you will still benefit on $1 million or so. And if they don’t, you’ll be glad you made the move.