QWe are a couple in our late 50s, currently living in our caravan and working around the country.

We sold our home, and with the cash from that and an investment due to mature we will have around $900,000. Together we have $184,000 in KiwiSaver. Mine is in a growth fund but my husband has just changed to medium-risk.

We have no debt. We are quite happy living in our caravan, and not sure where we will live when we do retire.

Should we invest everything in shares and leave it to mature over the next few years (perhaps in a growth fund)? Or should we buy an investment property to stay in the market and invest the remainder?

Apart from KiwiSaver we have not had much experience with shares, but are keen to learn. The global financial crisis made us nervous about investing in shares. However, the results in KiwiSaver and learning from you has us both much more confident. But with such a large sum now we are really unsure.

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.

QIn your first Q&A last week, you suggested a lady should place her term deposit funds, on maturity, into a cash fund. It will pay approximately the same as her term deposit but she could access however much she wanted at any time.

I have a number of term deposits and feel this type of account would be more convenient for me. I am 77 so receive NZ Super. I also have a reasonable share portfolio, so the term deposits are not funds I need to access frequently, but I like to have them available to buy a new car or similar. I do not want to invest further into shares.

Do all banks offer cash funds?

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.

QAs you have correctly pointed out in a recent column, if you go the diversification route you end up investing offshore.

But with that comes all sorts of downsides — most importantly an exposure to our exchange rate — one of the most volatile currencies in the world.

In addition transaction costs are not insignificant and can only come from the investors’ pockets.

Often forgotten in the US are both state and federal income and capital gains taxes. Then comes custodial charges etc, as well as funds management fees, as well as brokerage.

I have also heard horror tales where probate requires a search of all US states — mana from heaven for lawyers!

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.

QI forwarded to my daughters your April 20 column about the minimum KiwiSaver contribution non-earners must make to be eligible for the HomeStart grant.

You said they now need to put in at least $21.24 a week, or $1104.48 a year. This is because their contribution rate is 3 per cent of the adult minimum wage, based on a 40-hour week. And the minimum wage rose from April 1.

Up until April 1, contributing $20 a week — enough to receive the maximum government contribution of $521 a year — was also enough to get the HomeStart grant. But no longer.

I assume though that the $1104 is for a full year, but a smaller amount would be required this KiwiSaver year, ending June 30.

My calculations for this year are: 39 weeks (July 1 to March 31) times $20, plus 13 weeks (April 1 to June 30) times $21.24, which comes to $1056.12.

So for my daughters to qualify for the grant in the year ending June 30, they would need to contribute at least $1056.12 since last July 1. Is that correct?

It is unfortunate that from now on this calculation will have to be made manually. Perhaps you could persuade the government to change the rules to align the HomeStart grant date with that of the annual minimum wage adjustment, and to better publicise the contributions required.

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.

HOW WOULD YOU IMPROVE KIWISAVER?

The Commission for Financial Capability is reviewing how the government could improve KiwiSaver. What changes would you like to see included?

Send me your suggestions of up to 100 words, before June 23, with “Herald KiwiSaver changes” in the subject line. They could be rule changes, ideas on services that providers could offer members, information you would like to receive, or anything else.

I’ll publish some of your ideas in this column, and forward all the good ones to the Commission.

TWO REMINDERS
  • If you have contributed less than $1043 into KiwiSaver since last July 1, top up before June 30 to receive the maximum government contribution of $521. For info see my June 1 column.
  • If you are 60 to 64 and not in KiwiSaver, join before July 1 to get up to $2600 more from the government than if you join later. If you’re an employee, there may be still more money — from your employer. For info see my April 13 column.

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.