This article was published on 15 August 2015. Some information may be out of date.

Q&As

  • 70-year-olds should skip buying unit and spend their savings
  • How to set up a regular income from bank term deposits
  • One reader applauds my being tough on those with big credit card debt…
  • …While another is incensed by it

QWe are both 70-year-old retirees receiving NZ Super and also private super of $900 per month.

We have a freehold property with a c.v. of $1.4 million, and have $700,000 invested in one term deposit with one bank.

Would we be safer and better off if we buy a freehold investment property, eg a home unit? Or should we split our term investment money into more than one bank?

We would really appreciate your expert advice.

ASkip the property and get out there and live it up!

I don’t think a property investment is a good idea for you for a couple of reasons:

  • It could be a hassle. Tenants don’t always pay rent or treat a property well. And maintenance problems can be worrying. You don’t need that.
  • You’re tying up money you could be enjoying. While you can spend the rental income — minus insurance, rates, maintenance and perhaps property management fees — you can’t spend the value of the property.

And why not spend that money? There are delicious restaurant meals waiting to be savoured; plays, concerts, operas and ballets waiting to be enjoyed; exotic places waiting to be gazed upon; flash cars waiting to be cruised around in.

I’ve heard more than a few couples in their eighties say they wished they had spent more in their earlier retirement, while they could get around easily.

If you’re wanting to leave something to children or others, your house should be plenty.

To keep things simple, you could keep the $700,000 in bank term deposits. Yes, split it among several banks, just in case one gets into trouble and you lose a portion of your deposit under Open Bank Resolution — as discussed recently in this column.

But don’t be freaked out by that possibility. It seems much less likely than a fall in property values, especially around Auckland.

I suggest you set up your deposits so that you have one maturing every month or every few months. That will free up cash for spending — for fun or emergencies.

How much? One approach is to say that you’ll spend the money over the next 15 years, with the idea that NZ Super and the $900 per month should easily cover you after that. Many people say NZ Super alone is enough from 80 or 85 on, as long as you have a mortgage-free home.

Divide $700,000 by 15, which gives you $46,667 a year, or about $3900 a month to spend this year. Next year, divide the remaining total by 14, the year after by 13, and so on.

These days, interest rates are higher than inflation, so the monthly amounts should grow each year more than your expenses grow.

If you want to splash out in the next few years, perhaps on travel, you’re certainly in a position to do so. After that, just divide the rest by 14, 13 and so on — the number of years until you’re 85.

What if you don’t want to spend that much? I’m sure a charity would appreciate getting the rest, now or after you die.

I should note here that this is a simple approach. An alternative is to put some of the $700,000 — the portion you don’t expect to spend for several years — into bonds, and the portion you won’t spend for ten years or more into shares or a share fund. That way the money should grow more, because returns are higher on those investments.

You may want to get a financial adviser to help with this. For suggestions on how to find one, see the Info on Advisers page on www.maryholm.com.

QSome years ago you published an explanation on how to layer investment accounts to provide a small monthly income, and how to reinvest them if the capital wasn’t required.

I should have kept the reply but didn’t. Can you explain again, please?

AThis could apply to the couple above as well as you.

In most market conditions — including now — you’ll get higher interest for deposits with longer terms. So you don’t want all your savings tied up in short-term deposits just so you have regular access to it.

Let’s say you want $100 available each month, to spend if you wish. Put whatever amount will give you $100 after-tax in a one-month deposit — ask the bank to help you calculate the amount. Then do the same with a two-month deposit, a three-month deposit and so on, up to, say, two years.

Each month, you can spend the interest or reinvest it, but always reinvest the principal for two years — unless there’s an emergency.

That will give you some money every month, but the bulk of your savings will be earning higher longer-term interest. Some people call this laddering.

QIt was with interest that I read your article on credit card charges. I can’t believe that people think that it is OK to live on other people’s money. I know first hand that this can cause a lot of stress, trauma, and heartbreak.

How hard is it to pay off your card each month? Also grizzling because your bank won’t come to you with “deals”. Does he not realize that every bank has thousands of people like him and would rather deal with people who keep within the “rules”?

We are a couple of pensioners who get great treatment from our bank. They are happy to negotiate a higher interest rate on our meager investment, which is nowhere near the recommended amount you should have when you retire.

They also talk to us about ways to make our small savings work harder for us. (We were just getting on our feet after raising and educating our children when the 80’s crash came and we ended up with only our house — which we freeholded with our retirement money so that we couldn’t lose it as well as our jobs. Hence the small savings we have now.)

Why do not people live within their means? If you can’t afford Sky don’t have it. If you can’t afford a private medical scheme don’t have it, the public health system is really very good.

We are having a great life. We are not sitting at home being miserable. We go on holidays, go out for meals etc and we owe no one anything. Hopefully by the time we pop our clods our children will have enough to bury us and have our house.

Guess I have burbled on long enough so I will close now.

AThe next correspondent answers your question about how hard it is to pay off your card each month.

On your comment about banks preferring people who repay their debts, I’m not so sure. They make a lot of money out of interest rates around 20 per cent.

Still, it’s good to hear your bank treats you well — after a few recent complaints from other retired readers — and that you’re enjoying life.

P.S. Please don’t get cross if I say that I loved your “pop our clods” instead of “pop our clogs” in the same sentence as discussing your children burying you! You’re not related to Mrs Malaprop by any chance?

QAs a long time fan of your column I was disappointed, well incensed really, to see you put down those struggling with credit card debt with the smug line of the well off: “Well the smart way is to pay off the full balance of your card each month.” Ergo if you don’t you are not smart but stupid.

You underline your lack of understanding of people struggling with big debts by saying, “Please stop using your cards immediately”. Many people feel they have no choice but to recycle the small credit they generate by making the minimum monthly payment.

People end up with massive credit card debts for many reasons. Some stretch back to the time when a bank would send not one but two unsolicited credit cards and regularly raise the credit limit.

Sometimes people lose their jobs, have unexpected costs such as funerals (it may surprise you to know that the vast majority of people do not have $10,000 in an emergency account), and some are just not very good money managers. And maybe some gamble, smoke and drink their way into debt… but I believe that’s far from the norm.

For those who like me are trying to dig their way out of trouble it is a concern that banks are charging usurious rates of interest. An American credit card company is charging almost 22 per cent, but even the people’s bank has jumped on the bandwagon. Almost at the same time that the Reserve Bank lowered the OCR from 3.5 to 3.25 per cent my government-owned credit card issuer raised my interest rate from 12.9 per cent to 19.95 per cent — an increase of over 54 per cent just because they could (they didn’t offer any reason).

No doubt people with million dollar houses can discuss their interest rates with their friendly bankers, but I assure you the poor have very little bargaining power. By all means make constructive suggestions about budgeting services for example, but there is no reason to let profiteering bankers off the hook.

ASorry to incense you. I probably was rather unsympathetic to last week’s reader.

It’s always hard to know when “tough love” is appropriate with finances. Some people run up debt because they struggle to put shoes on their children, while others “must have” Sky TV, to use the example in the previous letter.

But even those in the first group have to pay their debt in the end, unless they go bankrupt or similar. And keeping the debt running for years — as last week’s reader implied he does — seems such a waste of money by those worst placed to waste it.

In the long run, they must end up with a lot fewer goods and services — because of all the interest they pay — than if they had saved for items before buying them. If a sharp word or two could encourage some of them to get rid of their debt and switch to saving, surely it’s worth it.

I realise all this sounds patronizing. Maybe next week I’ll find myself apologizing for that! I don’t know…

I fully agree that credit card interest rates are horribly high. I don’t see how banks can justify them. That’s exactly why I would love to see everyone who can’t pay their debts in full each month tell the banks to take their credit card business elsewhere.

Your suggestion about budgeting services is an excellent one. For info on free help with this, see www.familybudgeting.org.nz.

Are we friends again? I hope so, because I like people who care about the underdog.

More on credit cards next week.

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.