NZ Herald 16 April 2016

AKiwiSaver is like a hungry pig. All contributions are gratefully received.

The options for contributions via your employer are limited to 3,4 or 8 per cent of your before-tax pay. However, many people don’t realise that any KiwiSaver member — an employee or otherwise — can make other contributions directly to their provider. These can be lump sums or regular deposits.

You could, for example, ask your provider how to set up regular payments from your bank account of 2 per cent of your pay. This should be easy to arrange.

By the way, you’re lucky your employer puts in more than the required 3 per cent. That makes quite a difference over the years.

AIt all depends on how much risk you’re willing to take.

On the one hand, your total income is pretty high. And you’re young, so there’s plenty of time to recover if things go wrong.

On the other hand, you’ve already got a hefty mortgage. Just because Aucklanders have become used to mortgages of several hundred thousand dollars, that doesn’t mean they should make light of their debt. Adding to that mortgage raises your risk.

If all goes well, you’ll manage to meet the mortgage payments, everything else will run smoothly and you’ll end up selling the rental many years from now for a big gain. Even after paying tax on that gain, you head into retirement much wealthier.

But what if your tenant stops paying rent for a period, or the property needs big spending on maintenance, or mortgage interest soars, or one of you loses your job, or for any other reason you can’t make ends meet.

At that point, you sell the rental. That might be okay if the housing market happens to be buoyant at the time. The trouble is that bad economic things sometimes happen together. For example, a big rise in mortgage interest could push down house prices. So could increasing unemployment.

Landlords who are forced to sell sometimes find they’ve gained little or nothing after years of hassle. Sometimes they even end up with a debt to the bank after selling the property.

Sorry to be pessimistic. But I would rather see you get rid of your current mortgage, or at least reduce it lots, before you take on more debt.

Here’s a thought: Pretend one of you has lost your job, so you have to get by on one income. Then pour all of the other income into paying down the mortgage fast. Then get into rentals.

AThe only suitable New Zealand-based financial investment that I know of is a unit trust called AmanahNZ.

“Amanah New Zealand is an ethical and strictly Shari’ah compliant investment,” says the website. “Our mission is to provide a long-term (10+ years) investment of up to 50 US listed stocks that are conservatively selected and managed and comply with our ethical mandate.”

It avoids investing in money lending, alcohol, gambling, tobacco, weapons of war, pornography and pork. So far so good from your perspective, I imagine.

However, I have one concern, and that is that their use of the words “conservatively selected” could lead you to think this is a conservative investment.

Sure, the shares are “diversified across multiple industrial sectors and geographic economies”, which considerably reduces risk. But all share prices are volatile. While your balance will probably grow nicely over any period of ten or more years, it will decrease over shorter periods, and sometimes it will fall quite far before recovering.

The very fact that the website says, “Amanah New Zealand targets 10–14% (USD) average annual growth after fees, taxation and expenses,” is telling. That’s a high target. There’s no way anyone can receive average returns at that level without expecting the returns to be highly volatile.

Take note that the website calls this a “10+ years” investment. If you invest shorter-term money, there’s a considerable chance that when you withdraw it your balance will be lower. The shorter the period, the bigger the chance.

Even with money you’re happy to tie up for a decade or more, you must be prepared to watch your balance fall at times and not panic and bail out.

If that sounds too worrying, you may want to put, say, half your savings in the Amanah fund and leave half in the bank account to water down the volatility of your total savings.

By the way, Amanah also runs a KiwiSaver fund, so you could consider switching your KiwiSaver money to that fund.

AYou certainly don’t have to buy a house. As long as you reach retirement with enough savings to cover your accommodation as well as other costs until you die — or to buy a home at that stage — you’ll be fine.

In the meantime, it seems safe to assume that you won’t be buying a house within the next ten years or so. Do you plan to spend part or all of the $125,000 on anything else — such as travel — within ten years?

If yes, I suggest you put that portion into either bank term deposits or a conservative or balanced non-KiwiSaver fund.

To find such a fund, start by using the KiwiSaver Fund Finder on www.sorted.org.nz. Then ask the provider you’ve chosen if they have a similar non-KiwiSaver fund. Many do.

For money you’re happy to tie up for more than ten years, there are a couple of good options.

One is to find a non-KiwiSaver growth fund the same way — via the Fund Finder. While you could use a KiwiSaver growth fund, that ties up the money until you retire. And who knows? Between now and then you might change your mind about that house.

The other option is direct investment in shares. I reckon you need at least $100,000 to be able to get enough diversification, and you’ve got more money than that. You should aim to invest in at least 10 or 15 different shares, in a range of industries.

Approach two or three sharebrokers and ask to meet an adviser. Discuss how they could help you to choose shares and run your portfolio. Tell them you want to buy and hold, rather than trading frequently. They make more in brokerage if you trade more. But you’re likely to do better if you don’t. Go with the adviser you relate best to.

If you want to know more about investing in shares, I suggest you search online for the writings of Warren Buffett. One of the world’s richest people — through share investment — he probably understands the share market more than anyone else. And he’s very readable.

ANothing. It all sounds great to me. As has been discussed in this column lately, living off dividend income from a diversified share portfolio is fine if you have money to spare, which seems to be the case for you.

However, I wouldn’t like to see people who are struggling financially putting most of their savings in shares, in the hope of living from the dividends. It’s too risky for them.

But you’re quite right about the price of many household items.

Broadly speaking, most New Zealanders’ standard of living has risen considerably over the last few decades, as incomes have grown faster than expenses. It’s easy to overlook that.