QI once worked with a lovely young bloke who arrived every morning with a takeaway coffee, went out every lunchtime to buy something to eat, and never had any money.

The message I tried to get across was that using the office coffee machine and making a sandwich to bring to work saves $4 for coffee and $10 for lunch, and comes to $14 a day. Times five days a week, times say 45 weeks a year for three years comes to $9,450 — nearly $10,000 in the bank!

AA great example of how saving small amounts regularly really adds up. What’s more, you haven’t included the effect of compounding interest, which will boost the growth further.

Let’s say your young friend could save $70 a week every week of the year, not just for 45 weeks. He could probably manage that. It’s only ten bucks a day. The online calculators assume 52-week years.

If he earns 1 per cent after tax on his savings, he’ll have more than $11,000 after three years. And if he does it for ten years, he’ll have more than $38,000, according to the Savings Calculator on sorted.org.nz.

How about 50 years — say from age 20 to 70? He’ll end up with close to quarter of a million dollars. What a boon that would be in retirement.

Before we get too carried away, it’s only fair to acknowledge that quarter of a million will buy a lot less by then, because of inflation. But even after adjusting for that, he’ll have close to $130,000, which will fund quite a few retirement treats.

By the way, that inflation adjustment on the Sorted calculator assumes the young man’s $70 grows by inflation each year, which is reasonable. The prices of coffees and lunches will surely grow with the CPI over time. And wages tend to grow faster than the CPI.

So far, we’ve looked at a 1 per cent after-tax return, which might be an average over the years in bank accounts. Now let’s up the ante, and say he invests in a middle-risk KiwiSaver or other managed fund, and over the years he earns an average of 4 per cent after fees and tax. Our table shows that makes a big difference, especially over a long period.

How Savings of $70 a Week Will Grow

Return3 years10 years50 years50 years
Adjusted for Inflation
7%$12,100$52,000$1.53 million$641,000

Source: Savings Calculator on sorted.org.nz

And if he saves in an aggressive fund, at the highest risk level, his average return might be 7 per cent after fees and tax. Over 50 years his small weekly savings could grow to one and half million dollars. Even after adjusting for inflation, it would be close to two thirds of a million. Wow.

How could he use KiwiSaver for this saving? Hopefully he will be contributing at least 3 per cent of his pay over the years, via his employer. But he can also make further contributions directly to his provider, who should let him set up automatic transfers from his bank account.

Footnote 1: Wouldn’t it be wonderful to hear from the young man that he took your advice.

Footnote 2: When people are given examples like this, they often protest, “But I can’t start my work day without a cup of decent coffee!”. Fair enough, although perhaps you could talk the boss into installing a better machine at work. In any case, there’s sure to be something else you buy regularly that you could live without.

QIn August 2021 we reviewed our retirement planning with our bank. Having stuck with lowering term deposit rates I bit the bullet and transferred $300,000 to my moderate KiwiSaver. Immediately my $310,000 balance fell while deposit rates have climbed, I’m still down $10,000.

As I’m over 65 and can access this fund I’m tempted to put it on fixed term deposit at 5.75 per cent for 12 months, to get a short-term injection. I’d leave KiwiSaver open to return to after the 12-month term. Or leave this alone as it’s lower fees, and apply the same idea to the $590,000 in a moderate managed fund, which we’ll start drawing from in three years. It’s down $30,000 from August 2021, and the bank has just advised a projected long-term average gross return of 2.9 per cent on this.

It feels as though things are shrinking at exactly the wrong time. Any thoughts? Is there any point in getting an independent view and advice? I’m a devoted follower of your column so appreciate your “stick with it” advice, but we’re concerned we don’t have time on our side at 68 and 75.

AI suggest you stick with my “stick with it” advice.

Lots of people have been observing lately that bank term deposits are paying higher returns than KiwiSaver or other managed funds. But there are two key points to note:

  • Term deposit interest is before tax. Fund returns are usually published after tax. If, for example, you are in the 33 per cent tax bracket, 5.75 per cent on a term deposit is 3.85 per cent after tax. Not quite so appealing.
  • We are comparing what a term deposit will pay in future with how a fund has performed in the past. With interest rates rising, term deposits are of course looking better.

However, many funds should catch up. As their cash and bond investments mature, the managers will be rolling the money over into new higher-interest investments.

And when interest rates fall — which seems likely some time in the next few years — the lag will work the other way. This time term deposit rates will drop straight away, while funds will still have cash and bond investments at the old now-higher rates, so they will look better.

Over the medium term, then, it seems that your return should average out at much the same level in a term deposit or a fund. But there are other issues.

The downside of funds — in and out of KiwiSaver — is that you pay fees. But you can choose a low-fee fund.

And funds have these advantages:

  • Fund managers are dealing with much bigger sums than individuals are, so they might be able to get somewhat higher interest rates./li>
  • With term deposits you tie up your money for a period. With non-KiwiSaver funds you can withdraw it within a few days if you need the money. And for over-65s the same applies to KiwiSaver funds./li>
  • Almost all funds, except the lowest-risk cash funds and the highest-risk aggressive funds, hold some bonds. These come with some volatility, as we saw in the last couple of years. But over the long run you are rewarded with higher returns than on cash or term deposits.
  • Similarly, most funds except the lowest-risk ones hold some shares. Shares are riskier again than bonds, but bring still higher long-term average returns.

Your moderate funds will almost certainly hold bonds and shares. See the Smart Investor tool on sorted.org.nz to find out.

That means they were hit by the double whammy in 2022 — a really unusual year when both those types of investments lost value. But diversified holdings of both bonds and shares always recover.

So — all in all — I generally recommend that people in these types of funds stay put.

Okay, are you ready for another complication? What I’ve said so far assumes a moderate fund is the right one for you.

The basic rules are: Use term deposits or a cash fund for money you plan to spend within about three years, and a middle-risk fund or preferably a bond fund for three to ten years. For ten or more years, use a higher-risk growth or aggressive fund, which will give you higher average returns and protection against inflation.

But all of this depends on whether you can cope with ups and downs. And it seems recent volatility has been worrying you, so perhaps you should reduce your risk — using a cash fund or term deposits for zero-to-five year money, and a middle-risk fund for the rest.

That means moving your shorter-term savings, although it’s probably best to do it in, say, three chunks, a month apart. But please don’t then start moving it back and forth. There’s a real danger you will repeat your 2021 mistake and get the timing wrong again. Not even the professionals are good at timing markets.

The rest of your savings could stay in one of your moderate funds. I suggest you put it all in the fund with lower fees.

QI read in your article last week about dividing estates between the children of children. The issue is that one child may have more offspring than another.

However, what the writer did not consider is this: the grandparent is not dividing the estate amongst their children — they are dividing their estate amongst their descendants.

So it’s not as if you have one child versus me who has two children, so I get a bigger share. I get the same share as you. My children are individuals and their relationship with their grandparent is theirs.

AI like your way of looking at this tricky issue.

QOn inheritance — a suggestion which worked: My Mum survived Dad and she left her will — four children and 11 grandchildren — divided into five. Of the fifth that went to the grandchildren, each one got the same amount — so if one child had four children and another had two it wasn’t unfair to the young ones.

I’ve done the same with mine, although I’ve had to change it, as I’ve already given one granddaughter $4,000 towards a deposit on her first home. That was all she was short, and I knew she was a good saver. She gets $4,000 less when I pop my clogs. I’d do the same for the others if needs must.

My Mum did this as her mother’s will was not ideal — four children and 11 grandchildren — divided five ways, but the eldest grandchild of each family also got an extra £500 (in 1971). We could never understand why she did this, or her lawyer that advised her.

Families! Thank goodness mine want what’s best for me — holiday in warmer climate coming up!

AThere are those who say, “Give it all to your children. The grandkids can inherit from them.” But that tends to mean the kids in larger families or big-spending families end up with less in the long run. Your system at least reduces that effect.

Great that you could help your granddaughter into her home while reducing her inheritance, to keep it fair. I hope she understands that, and so do her siblings and cousins, who might have been watching what looked like favouritism. Openness on these things usually works best.

Your grandmother’s extra inheritance for the oldest is indeed strange. Ideally the parents would have stepped in and topped up the other children’s money. Otherwise these things can lead to long-term resentment.

Enjoy your holiday.

QIn last week’s lead item I feel the primary recommendation should be to gift the children equal amounts and leave them to decide how to pass the windfall down to their children (if any).

Many families have a great mixture of grandchildren at any one time — adult, sub teen, step, and some children have none at all!

No distribution is going to be perfect, but too much sharing around can cause more trouble than it solves.

AOn your first point, see the previous Q&A. Still, your second paragraph strengthens your argument — as does my comment last week about grandchildren born after the money has been handed out.

This is all getting too hard. Maybe the best idea is to just blow all your savings while you’re alive!

Sorted Money Month

The Retirement Commission is running Sorted Money Month throughout August. This year’s theme is “Pause: Get sorted”.

“We’re encouraging Kiwis to hit pause and take a moment to find the information they need to make good financial decisions,” says the Commission’s Tom Hartmann.

There will be more than 50 Money Month events throughout New Zealand. For more information see here.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. 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 [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.