NZ Herald 14 November 2020

AThe FIRE movement intrigues me.

The basic idea, as I understand it, is that you save really hard and invest wisely until you have saved 25 times the amount you spend each year. Then you can retire, and live on 4 per cent of your savings each year.

That savings goal sounds impossibly high. But if you cut your spending back to, say, $20,000 or $30,000 a year, the goal is a reachable $500,000 or $750,000. And the amount you save each year will be higher, and boosted by compounding returns.

FIRE seems to turn frugality into a challenge, something to be proud of, rather than a way of life that feels like deprivation.

Most of us do so much “necessary” spending that isn’t really — on extra clothes, home furnishings, restaurant meals, new cars ….. And your examples are all thought-provoking.

Why must we be in fashion, or playing with the latest toys? It’s often about what others think — or what we think they think. But do we really like someone more because of their clothes and their stuff? Arguably we might like them less.

I expect most FIRE participants still have some pricey treats, but they get used to splashing money around less often and are just as happy. I know of a woman who, for several years, wore the same simple black dress everywhere. She must have bought two or three of them I suppose. But she enjoyed making her “statement”.

Tricky issues for FIRE fans might include how much you spend on wine or other gifts when the recipient has spent a lot on you. But perhaps you can spend more time or creativity on what you give back to them.

When I wrote about FIRE in this column in February, I was worried that participants might become too absorbed in money because they consider it all the time. Also, some people who retire young get bored. Work gives many people added purpose in life.

But I don’t suppose these things matter. If you change your mind, you can just go back to saving less and retiring later. You’ll have a large retirement nest egg built up, and if it’s too big you can always give some to charity.

Meantime, I can only applaud your decision to spend lots of time with your wife and little one. Be prepared for some challenges when your child is older and wants all the stuff the other kids have. But I’m sure you’ll cope. Giving the child a budget for fun stuff might help.

Other readers can see the article you refer to here. By the way, you — and more and more people these days — refer to “math” rather than “maths”. American English is sneaking into New Zealand, which appals some, but does it really matter?

AI think it’s worth having that basic cover.

Health insurance costs more as you get older simply because you are more likely to claim. If you develop further health problems, the last thing you want is financial problems as well.

I’ve said before that it’s best to be a loser with insurance — you pay more in premiums than you get back in claims — because that means you’ve had a good run. But I’ve changed my mind. Even the lucky people are not really losers. Their premiums have bought them peace of mind, which is no small thing.

AOf course not. You’re perfectly entitled to make whatever investment you choose.

However, I do worry that new investors in rental property might underestimate the risks of buying in the current buoyant housing market.

Earlier this year, pretty much every economist predicted Covid disruptions would push house prices down. So far the opposite has happened. But over the long term the mismatch between average incomes and house prices has got to adjust.

The average price of a New Zealand house has risen from about three times household income in 2002 to more than seven times income. In Auckland the rise is from four times income to more than ten times. Logic tells us that can’t go on forever.

And what if mortgage interest rates rise? Maybe they won’t for a while, but it’s hard to imagine rates staying this low for years.

Still, if you stick with your property investment for the long haul, you will probably do at least okay and maybe really well.

Another option you suggested, which is less time-consuming and just as likely to bring in strong returns over the years, is shares. Like rentals they are risky over the shorter term, but diversified shares always do well over a couple of decades.

The easiest way to invest in shares is through a managed fund, in or out of KiwiSaver. You don’t have to worry about which shares to buy and sell, or handling dividends, tax and so on.

If you choose a higher-risk aggressive or growth fund, most of your money will be in shares. If you want something less volatile, pick a balanced fund — although your average returns over the years will be lower.

I suggest you use the KiwiSaver Fund Finder on sorted.org.nz, and choose from the funds charging lower fees. If you would prefer to have access to your money before you are 65, ask the provider if they have a similar non-KiwiSaver fund. They probably will.

What if you want to do the share investing yourself? You could do it relatively cheaply on one of the online share buying platforms — Hatch, InvestNow or Sharesies. But if you do that, buy and hold a wide range of New Zealand and international shares, and don’t try to gain by trading. Most people who frequently trade do worse than the quieter ones.

One more complication. Whether you choose a rental property, shares or a managed fund, I strongly suggest you also join KiwiSaver and invest at least $1,042 each year to receive the maximum $521 government contribution. The easiest way is to set up an automatic deposit of $87 a month.

If you can’t afford to do that from other income, you could transfer the money out of a non-KiwiSaver or share investment. But if you are putting your inheritance into a rental or a KiwiSaver fund, you may need to set aside some of the inheritance for the KiwiSaver deposits. Perhaps keep it in bank term deposits.

Is this worth bothering with? Well, if you invest in a low-fee KiwiSaver growth fund you might average a return of 5 per cent a year after fees and tax. By the time you reach 65 you should have about $40,000.

Without the government KiwiSaver contribution that would have grown to about $27,000 elsewhere. You might as well have $13,000 extra for retirement fun.

AAnybody can contribute to anyone’s KiwiSaver account.

On timing, to get the maximum $521, the member or somebody on their behalf must contribute at least $1,042 during the July-to-June KiwiSaver year. The contributions can be in any pattern. But as mentioned above, it works well to automatically deposit $87 a month.

But — and this is a big “but” — your relative is not eligible for the government contribution while they are living out of New Zealand.

How will their KiwiSaver provider or Inland Revenue know, if the relative hasn’t sent in a change of address?

They probably won’t in the short term. However, “when you apply for NZ Super at retirement you have to sign a statutory declaration declaring all of the periods that you were overseas,” says an adviser to the KiwiSaver industry. “To keep the government contributions therefore for those periods you would have to lie or conveniently have memory loss.

“Also, these days with technology the IRD will be able to look at periods that you paid no tax in New Zealand and ask questions. Likewise the IRD administers the student loan scheme and so picks up details of departures.”

When you’re lining up for NZ Super, it’s not clever to start fibbing.

Adds the adviser, “The real question is: does the person, probably a parent, want the poor people in south Auckland to have to pay higher taxes so that the person overseas can get a government contribution, when they are not paying taxes here or contributing to the economy? Perhaps they also do cash jobs?”

But he’s leaping to conclusions. I’m going to assume that you will play fair.

None of this stops you from contributing to the KiwiSaver account anyway, to help build up your relative’s nestegg. But that person should tell their provider they are overseas.