NZ Herald 13 June 2009

AYour wish is my command — hence the picture. What a lovely story. The only thing that doesn’t ring true is your use of the name John. After being probably the most popular boys’ name in my generation and my parents’ generation — I and two of my closest childhood friends all had Dads called John — there are hardly any twenty-somethings called John.

But I digress. In answer to your question, we used the picture last week to illustrate what can go wrong with rental property — because many people don’t seem to understand the downside. But, as you point out, investing in rentals can be rewarding, and not just financially.

It seems to me that some people are born landlords and some certainly are not. The couple of times I’ve had rental properties I didn’t enjoy the feeling that I owned somebody else’s home. There was a sort of uncomfortable power imbalance.

But clearly that’s not an issue for you. Also, you’re obviously good at picking tenants, and they appreciate you. And you are a happy handyman, which makes all the difference. Well done.

AIt’s great that you’ve jumped aboard the KiwiSaver bandwagon before turning 65. You’ll get several thousand dollars from the government, and you have to wait only five years to get your hands on the money.

As someone who joined KiwiSaver over 60, you’ll get the tax credit — which matches your contributions up to $1043 a year — until the fifth anniversary of your joining date.

And yes, after your first year in the scheme is over, you can “lump sum” — we seem to have come up with a new verb here — any time during the KiwiSaver year.

That may not be the best strategy, though. It’s generally better to drip feed money in, so you end up making at least some contributions when prices are relatively cheap. Putting in $87 a month is good for that, or even $20 a week, if you can manage that. An easy way is to set up an automatic transfer out of your bank account.

AFirstly, let’s explain a couple of things to other readers. The tax credit is not available to members under 18. For over 18s, the maximum credit in the first year of membership is proportionate to how much of the July-June KiwiSaver year they have been a member.

You are considering contributing 10/12ths of $1043, because your son has been in the scheme for ten months of the KiwiSaver year. That would work fine if he had been over 18 all year. But because of his age, he won’t be able to get a tax credit that big.

“KiwiSaver members who turn 18 during the member tax credit year (1 July to 30 June) are eligible for the tax credit for the portion of the year that they’re 18,” says Inland Revenue.

To get the maximum amount, multiply $1043 by “days”/365. “Days” refers to the number of days between your son’s birthday and 30 June. For example, if his birthday is June 20, his maximum tax credit is $1043 times 10/365, which comes to about $29.

It’s peanuts, but you might as well contribute that amount before June 30 — and preferably now, to make sure there’s time for it to be processed. The tax credit will double the contribution — which all helps. And from now on your son will get $1043 a year, provided he also contributes at least that much.

I asked Inland Revenue if you will have to notify anyone about the 18th birthday. Their reply: “After 1 July each year, providers apply for member tax credits on behalf of their members. Part of the application information includes the number of days in the year that the member met the tax credit age requirements.

“So all the member has to do is make sure they have contributed at least the maximum amount and they will get the credit once their provider applies for it.”

Readers who want more info on tax credit timing in their first year in KiwiSaver can go to www.maryholm.com. Look under Incentives on the KiwiSaver Basics page. [This page has been removed from the website. Visit kiwisaver.govt.nz for up-to-date information.]

AIt’s time, once again, for an old message: Don’t try to time markets.

It sounds as if you had a bit of beginner’s luck with your move last year. That’s great — as long as it doesn’t make you think you really can predict trends, when in fact even the experts fail as often as they succeed. It’s a fool’s game.

I suggest you forget about where you think the markets are likely to go and consider two other issues:

• How long it will be before you expect to spend the money. If it’s within ten years, invest in a mainly bond fund, moving gradually to a cash fund within two or three years of your spending time. If your horizon is longer than ten years, consider share and/or property funds, which are more volatile but likely to give higher long-term returns.

  At 58, you might still have more than ten years to play with. Just because the government’s KiwiSaver tax credits and compulsory employer contributions will stop at 65, that doesn’t mean you have to spend the money then. You could keep it accumulating returns until you are 80 or 90 if you wish.

• How well you tolerate ups and downs. Even if you have a decade or more up your sleeve, if you’re likely to panic and switch out of a riskier fund after a market slump, you should probably go for a more conservative fund.

  Once you’ve built up quite a few thousand dollars in KiwiSaver, it would be a real pity to ride the market down and get off at or near the bottom. Those who do well in share and property funds are those who stay on board regardless of the markets — until they get within about ten years of their spending date.

In light of those two issues, decide how much risk you should take. Move to a fund with that level of risk and stay put. Not only will you do better over the long term, but you’ll free up the time you spent watching markets to read novels or walk on beaches.

And don’t worry if your fund returns are pretty low at times. Because of the KiwiSaver incentives, the returns on the money you put in will be considerably higher.

Let’s say, for example, that so far you’ve put in a total of $5000, your employer has put in $3000 and the government has put in $2000, for a total of $10,000.

If your current return is 3 per cent, that’s $300. But when we look at your $5000 of contributions, the return on that is 6 per cent. You couldn’t have got a return like that elsewhere in a low-risk investment.