This article was published on 15 April 2017. Some information may be out of date.

Q&As

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QMy 13-year-old son has saved over $11,000 from lemonade and walnut sales (he started when he was 7 years old). He also has a KiwiSaver fund which he contributes to.

As he gets older he will make decisions about how to use these funds. One choice could be to put aside, say $10,000 for his retirement and invest it in an ordinary bank deposit with monthly compound interest. By the age of 65 he would accumulate a substantial amount suitable to retire on, mainly due to the large amounts of interest received in the last 10 years or so of the investment.

Will his KiwiSaver provider pay out large dividends towards his retirement age or simply an averaged return based on all the investors in his particular KiwiSaver fund? From what I can see the ordinary bank deposit is the best way to go (if he can keep the funds untouched!).

PS: I am a single mum trying to teach him financial management — hopefully he doesn’t blow his savings on a car!

PPS: If all kids or young adults could save $10,000ish and invest it for retirement, there would be no issues about retirement funds!

AIt probably doesn’t matter where your son puts his teenage savings — even if the car wins. It sounds as if he has extraordinary entrepreneurial skills, and he’ll probably earn many thousands more by the time he retires.

But still, he might as well do the best he can with the money. He might need big bickies at some stage to start a business. Or he might give major contributions to charity.

That’s an interesting idea to put aside $10,000 for retirement. Normally I think buying a first home is the appropriate long-term goal for the young. Retirement is just too far away to be on their radar. But maybe your son will be a position to do both. And you’re quite right about big returns in the last decades of really long-term saving — because of compounding.

For example, $10,000 earning a return of 3 per cent after tax and fees would grow by about $8000 in the first 20 years, by almost $15,000 in the next 20 years, and by more than $26,000 in the third 20 years.

If your son invested $10,000 at 15, he would have almost $59,000 at 75.

Still, that’s not enough to have no issues about retirement funds, especially given that inflation will probably seriously erode the value of money over such a long period.

To get well ahead of inflation, and to make the most of compounding, your son really needs to invest in shares, and perhaps some commercial property.

Let’s say he got an average of 6 per cent after tax and fees from those investments. His $10,000 would grow by more than $22,000 in the first 20 years, nearly $71,000 in the next 20 years, and an impressive $227,000 in the third 20 years. By age 75 he would have almost $330,000.

The 6 per cent might be a bit high. It’s impossible to predict. But in any case the returns on shares and property are always considerably higher than on bank term deposits over long periods. The returns will, though, fluctuate and sometimes fall, so your son must be prepared to ride out the tough times and not move his money.

KiwiSaver is probably the best way for him to make such an investment, in one of the highest risk, or aggressive, funds. Or, if he wants a bit less volatility over the years, he could choose a growth fund — which typically has most but not all its money in shares and sometimes some property.

From your comments, I think you’re misunderstanding how KiwiSaver works. Each person has their own KiwiSaver account. Everyone who has invested in a particular fund receives the same percentage return, but those with more money receive a higher dollar amount. There’s no watering down effect.

The one big negative about KiwiSaver is that the money is tied up until you buy a first home or retire. If your son wants to retain access to the money — in case he needs it to start the next Facebook — he could save in a non-KiwiSaver fund that’s similar to a KiwiSaver fund. Most providers offer them — although in many cases their fees are a bit higher outside KiwiSaver.

One final comment: I wouldn’t worry if your son wants to buy a car in a few years. Having wheels at, say, 18 would be a good way for him to learn that if he works hard and saves he will be rewarded.

QI was aghast at reading your lead article two weeks ago, about the young woman living on a benefit.

In the 70s I was married with two young children and a large mortgage.

I was a self-employed carpenter in a building downturn. I found myself without work for a couple of weeks, no income.

I phoned the equivalent of WINZ. I asked if I could borrow a few dollars to feed my family until some work came in. I was told to sell my tools and live on that and come back when I had nothing. I said that if I sold my tools I would not be able to work again. I was told that was the rules. Having an amazing wife, we lived on the few tins of food in the cupboard. Did small jobs and got by.

Now it seems — from what the young woman in your column said — you can have “several thousand dollars” in the bank and $8,000 in KiwiSaver and still get a benefit of $210 a week for two years.

I can only add that I am shocked that my tax could be helping this person to buy a second house.

AGiven your story, I would have thought that you — of all people — would be sympathetic to the idea that the government shouldn’t make a person sell their assets before getting a benefit.

As noted last week, benefits are income tested, and supplementary payments, such as the Accommodation Supplement, are asset tested. But eligibility for the basic benefit is not affected by what assets you own or how much you have in the bank.

For many people, the basic benefit just tides them over a short but difficult period. Do we really want to force people in that situation to sell their assets, making it hard for them to get back on their feet again?

Perhaps you’re worried about wealthy people exploiting this. But I doubt if many would. It’s not that easy to apply for a benefit — as you already know. And as the correspondent two weeks ago said, living on a benefit is “hugely demoralising after spending the past 21 years raising my daughter on a low income whilst putting everything I could towards my mortgage payments.”

On the fact that she was thinking of buying a second house, I pointed out that that was unrealistic. Her main idea — and the one I encouraged — was to get a tertiary qualification to improve her chances of getting a good job. Surely you don’t want to knock back someone with that goal?

QA future column might address how last week’s pictured young lady could keep her foot at a complete 90-degree angle whilst smiling. Impressive!

AYou’re talking about the picture in last week’s paper, as opposed to the online picture.

And all I can say is her right foot is at a right angle, so it must be all right.

QJust a few words of thanks for the information you provided in your column in August last year, when you said amounts arising from voluntary contributions made to foreign state pensions schemes are exempt from being deducted from NZ Superannuation. This was the first that I had heard of this, and that probably goes for a number of people.

There is a dearth of information on the MSD website about the exemption, and certainly there was no mention of it at my interview with MSD when applying for NZ Superannuation just before I turned 65, even though it should have been evident from the form I gave them at the interview.

As it turns out, roughly half the contributions I made to the UK state pension scheme were made voluntarily whilst I was working overseas. So after reading your column, I wrote to MSD asking if I had been underpaid and, if so, please could my pension be recalculated and any arrears paid to me? I quoted your column as my source of information.

After a bit of to’ing and fro’ing, and blaming of the UK pension people, I have now received my arrears and increased pension — so thanks again for the info.

AThat’s great to hear. And — given your story — perhaps it’s worth repeating the info for others.

Generally, if you receive a pension run by an overseas government, that pension will be deducted from the amount of NZ Super you receive.

But there are exceptions. One is for government occupational pensions paid “purely for a period of employment with a government agency (that is, it is the equivalent of a private occupational pension, but the employer happens to be the government),” says a spokesman for the Ministry of Social Development.

Another — the one that applies to you — is that “The Ministry does not currently directly deduct the portion of an overseas pension that is based on voluntary contributions.

“In order to receive New Zealand Superannuation as well as an overseas pension, we would require verification from the overseas agency that the pension, or some proportion of it, was based on voluntary contributions,” says the spokesman.

“Because every country calculates pension amounts in a different way, we cannot attempt to calculate the proportion of a pension that is voluntary. We have to rely on the paying country to tell us.”

Thanks for writing.

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The Reserve Bank and I have just updated a 63-page booklet I wrote for them a few years back. It’s called “Upside, Downside — a guide to risk for savers and investors.”

Aimed at ordinary New Zealanders, the booklet looks at “The one high-return, low-risk ‘investment'”, which is paying off debt. Then it considers 20 different types of investment risk, where and when they crop up and how to minimise them.

Risks include: overdoing borrowing; expecting past performance to continue; taking foreign exchange risk — or not taking it when you should; letting your emotions rule your investment decisions; and counting on dividend income.

Each risk is discussed generally, and then applied to KiwiSaver.

You can read or download Upside, Downside here.

By the way, I don’t make money out of people downloading the booklet. I just hope you find it useful.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding 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.