NZ Herald 15 June 2019

AI love your adventurous spirit. But are you as brave with your money as you are with your lifestyle?

Let’s assume you’ll want to retire in five to ten years, and that you will then spend about $600,000 on buying a home — about the New Zealand average. That means you would use the other $500,000-odd for spending in retirement.

In light of that, both your investment suggestions are pretty risky.

I usually recommend shares for money you are tying up for more than ten years. Over a shorter period, there’s a fair chance your balance could fall.

A rental property seems less risky because, as you say, it keeps you in the property market. But if the property is in a different part of the country from where you decide to retire, it might be a very different market.

Recently Auckland house prices dropped 4.4 per cent over a year, while in the rest of the country they rose 6.7 per cent. Even within Auckland, Mt Albert prices fell more than 30 per cent, while they rose about the same amount in Takapuna.

I don’t think you could be certain of a gain in any property market over the next few years. You could face a loss on your rental but rising prices in the area where you want to buy your home.

There are also worries about running a rental property from a distance. You would probably have to hire a property manager, which would eat into your profits.

So both options feel a bit uncomfortable to me. If I were you, I would put the money you expect to use for a home purchase into a fund that invests mainly in bonds. It could be a KiwiSaver fund — but not if you think you’ll buy before you turn 65, because of access.

Investments in bond funds can fall — if interest rates rise and make the bonds already in the fund unattractive. But they are not nearly as volatile as share funds or property.

As you get within three years of buying a home, gradually move that money into a cash fund. That would make it really unlikely it would lose value when you are about to buy.

What about your retirement spending money? The amount you expect to spend within ten years should also be in the bond fund, and gradually moved to the cash fund as you approach retirement, so that your spending for the next three years is in the cash fund. But the money you expect to spend more than ten years away can be in a growth fund — which holds mainly shares.

Too conservative? Maybe, given your attitudes. But I’m worried that you’re overconfident because shares have had an extraordinary run since the global financial crisis, both in New Zealand and globally. That can’t go on forever.

Still, if you want to put more into a growth fund, go for it. Just promise yourselves that you won’t bail out when the markets fall. Stay put — and perhaps also stay in your caravan — until shares grow again.

For how to find cash and bond funds, see the next Q&A.

AYes, all the major banks offer cash funds. They’re sometimes called cash PIEs because they are portfolio investment entities, on which taxes are a bit lower than for ordinary term deposits. For info on them see here.

The trouble is the current returns are lower than I thought, so I’ve now got a better idea.

From July 1 people over 65 can join KiwiSaver, and they can withdraw money at any time. Consider putting your money in one of the lowest-risk KiwiSaver funds, called defensive funds. If you choose one that invests only in cash, it’s highly unlikely your balance will ever fall.

You can see info on the funds on Smart Investor. Returns are 5-year averages, after fees and tax. For details on a fund — including whether it invests only in cash — click on its name and look under “Mix”.

On Smart Investor you can also see similar non-KiwiSaver funds, called “Managed funds”, but note they tend to charge higher fees.

People looking for bond funds — as mentioned in the previous Q&A — can use Smart Investor in the same way. This time, though, you’re not looking for defensive funds that invest in cash, but the ones with more than 90 per cent of their money in bonds. They often have “Bond” or “Fixed Interest” in their name.

AAll of which explains why most New Zealanders should do their overseas investing in locally run funds that hold foreign shares and bonds — in or out of KiwiSaver.

It keeps things simple, as you hold a New Zealand investment. And despite the various expenses and taxes, the fees are often similar to funds that invest in NZ shares and bonds. This is probably because these funds usually invest in huge international share funds, with really low fees.

As for currency risk, if you are planning to spend a fair bit of your retirement money on international travel or imported products such as cars and electronic goods, you actually reduce your risk by having some of your savings offshore.

If the Kiwi dollar rises, the value of your overseas savings will fall, but you won’t mind too much because imports and travel cost less. And if the Kiwi dollar falls, imports and travel will cost more but you’re okay because your money is overseas retaining its value.

Confused? The basic message is: it’s good to have some of your retirement savings overseas.

AFirstly, a clarification for other readers. We’re talking about people who receive no regular income, like students and non-earning partners. Others have to contribute 3 per cent of their income or benefit, for at least three years, to be eligible for the HomeStart grant.

Your calculations for your daughters are correct, says a Housing NZ spokesperson.

I don’t think it would work to align the date with the minimum wage adjustment, as all other KiwiSaver calculations are for the July 1 to June 30 year. But I do think Housing NZ could explain it all more clearly on its website. However, the spokesperson says there are no plans in the short term to change the information.

There’s one way to simplify things though. As I said in the April 20 column, people in this situation could just raise their contributions to $25 or $30 a week so they don’t have to worry about it again for a few years. Not many people would miss just a few more dollars a week — and it’s going into their savings for a first home.