Your money or….

QMy husband and I are both 66. I work three days a week, my husband four. We both aim to work another couple of years. We are mortgage-free with no dependents.

I have $350,000 in KiwiSaver, my husband $50,000 which we do not need to access yet (and are still adding to). We also have $80,000 in term deposits.

We have always had life insurance but have decreased the cover over time, particularly when we paid off the mortgage and the kids left home. There is $250,000 on my husband’s life and $50,000 on mine.

My question is, bearing in mind the only certainties in life are death and taxes, should we continue with life insurance or when should we cancel it?

At the moment we can easily afford the premiums — $243 and $72 monthly. But I guess when we finish work it may become harder to find these sort of amounts, especially as they keep going up the older we get!

I resent the idea we have paid for life insurance for the past 40 odd years and have seen no return! Advice please.

AWould you really prefer to have had a return on your money? Think about it!

Actually, though, you have received something significant for all the dollars you’ve paid out: peace of mind. The knowledge that if one of you had died, the other would have received a large sum must surely have made you sleep better — especially while you were raising your children and paying down a mortgage.

Now, though, you probably don’t need the cover any more, with your mortgage-free home and close to half a million dollars in savings. I think the $3,780 you’re paying each year, which as you say will keep rising, is probably better put into your KiwiSaver accounts — or health insurance if you haven’t got it.

As people get older, it makes sense to drop the life cover and pick up the health cover. Read on.

Stick with health insurance

QA few years ago you wrote about health insurance. Given that many things have changed since then, can I ask your advice on maintaining the high cost of health insurance for my husband and me, both in our mid 70s?

We are in good health and have a policy that pays 80 per cent of costs. However, the price keeps rising each year as we age. How long should we carry this on, even if we can just afford it?

AThe price of health insurance does rise sharply as we get older. But you just have to look around you to understand why. Even though you and your husband are healthy, I would be surprised if you don’t have friends your age who have various health issues — in some cases despite their healthy lifestyles.

In any case, I don’t think health insurance — like house, contents and car insurance — is just about how much you’ve paid versus how much you’ve claimed. If you pay a lot and claim little, count yourself lucky, rather than ripped off. While people who claim often might get their expenses covered, they still face all the worries and hassles that come when their health — or house or car — goes wrong.

You never know what lies around the corner. If your or your husband’s health suddenly deteriorates, the last thing you need is financial worries as well. I suggest you stay insured.

Retiree living costs 1

QIn response to what you said last week, I also get impatient with some of the claims about how much is needed for a comfortable retirement. My wife and I are very happy with what we have.

We live in Auckland, own our home, and are in our early seventies, both active and in good health. We have $165,000 invested, most in ASB term investments, the rest in KiwiSaver. That, with NZ Super, is more than enough to fund our lifestyle.

We were able to visit family in the US last February and plan on spending our 50th wedding anniversary in Hawaii next year. We shop carefully, chasing supermarket specials, but don’t stint ourselves, buying what we need when we need it and running two cars. And we even have enough to help out family occasionally and to donate to charities.

The many recommendations about the various amounts needed for retirement are unrealistic and potentially worrying for many, who may despair they won’t have enough when retirement comes.

AThanks. I’m sure your words will comfort many.

Retiree living costs 2

QMy wife and I, both in our 80s, sold up and moved into a retirement village last September.

We brought up five children, all have done well, and we were mortgage-free by our early 50s — by sheer hard work and going without.

We stuck to term deposit investments and, since moving, have surplus funds to add to that. I have continued with laddering as you advised. We now earn about $1,000 a month in interest after tax. Each time an investment matures I reinvest for another 180 days. Add the interest to our pension of $763 a week and we have more than enough to live on.

Our outgoings here, in an upmarket complex, are $819 a month fixed. Brand new villa with all the facilities you could imagine, no rates or house insurance, lawns or gardens.

There will always be some who will not move to a retirement village because you lose 30 per cent when you sell. We have two friends like that, neither have children, all very unwell. Beats me, but that is their choice.

We have family in Australia, travel there twice a year, best seats, and do not go without. Our children were very supportive of our decision to move.

The advisers that tell people they need a million dollars before you retire have really no idea. We do not spend what we earn each week and have decided to share with the children what we have. Better to do it now than when we die.

What I am trying to say is do not leave it too late. While you are both alive it’s easier to shift house than on your own. You certainly do not need a huge amount of money to enjoy the last years of your life.

AYou add another perspective on retirement costs. Thanks for writing. More on this next week

In reverse

QI am surprised every time you suggest reverse mortgages as an option to people who write to you, when they have viable other choices.

With compounding interest and the total debt repaid when the house is sold, owners often have very limited options if they are still requiring somewhere to live. Renting or relying on relatives seems to happen a lot from anecdotal evidence, as they can no longer afford a property of their own.

If you are certain you will die before you need to relocate it might work in your favour, but otherwise it seems to ruin people’s financial wellbeing and options.

AI mentioned reverse mortgages in passing last week. Perhaps it’s time to once again go into the subject in a bit more depth.

Homeowners over 60 with mortgages repaid or nearly repaid can often get a reverse mortgage. They repay no principal or interest until they sell the house or die — although they can usually repay the loan if, for example, they receive an inheritance in the meantime.

These loans enable people to make use of some of the money tied up in their home, instead of struggling financially through retirement while owning an asset often worth more than $1 million.

The downside — and it’s a big one — is the interest compounds over the years. What’s more, the rate is higher than on an ordinary mortgage. The main providers of the loans are Heartland Bank, which currently charges 9.98 per cent, and SBS, which charges 9.95 per cent — although the rates are variable and could be expected to fall over the next few years.

How fast do the loans grow? The useful reverse mortgage calculator on Heartland Bank’s website tells us that:

  • A 65-year-old in a $1 million home, who borrows $100,000, would owe about $1.2 million at 90 — although it’s not as alarming as it seems, because their house value would have risen lots by then.
  • A 75-year-old, with the same house value and $100,000 loan, would owe about $440,000 at 90. That’s just over one third of the 65-year-old’s debt.

As I mentioned last week, I recommend spending most of your savings before getting a reverse mortgage. Ideally, don’t get one until at least your mid 70s.

Even then, avoid borrowing a lump sum. Most providers will let you either gradually increase your loan — receiving, say, $300 a week — or add to your borrowings whenever you need to. The idea is to keep the balance as low as possible for as long as possible, to keep the compounding interest under control.

Getting back to your letter, sure, if people do have other choices, use those first.

On limiting options when you sell your house, both Heartland and SBS will in some cases let you transfer the loan to your new place. But they don’t tend to lend on retirement village accommodation. Because of that, I have suggested before that people considering a reverse mortgage may want to check out retirement village costs first.

If moving into a good village now would cost about the same as your house is worth, you should probably give reverse mortgages a miss. But if selling your home and moving to a village, and the subsequent costs of living there, would leave you with considerable money left over — like the couple in the Q&A above — a reverse mortgage could work well.

Note, too, that even though retirement villages are increasingly popular, only about one in seven people over 75 live in them. I expect it’s more common for retired people to move to smaller homes or to a lower-priced region, in which case a reverse mortgage on their earlier home may not be a problem.

The sad stories you refer to are probably about people who have taken out a reverse mortgage in their 60s or early 70s, and haven’t kept a tight rein on how much they borrow.

A much better idea is to plan to spend your savings so they run out in your mid 80s. After that, many people find NZ Super is enough. But if you want to race around the world for your 90th birthday — or hire extra help to keep you in your own home — a reverse mortgage might be just the thing.

Thank you

QCongratulations on your excellent response in last weekend’s Herald, to the know-it-all, supercilious armchair critic. Your CV is very impressive, and I suspect he/she is feeling rather embarrassed now! The back page of the Business section is the first thing I read on Saturday.

AIt’s been heartwarming to receive yours and so many similar emails. Thanks very much, everyone. Among the comments:

  • I LOVED the answer you gave to the person (I’m imagining it was a pompous, self-important older man).
  • I do not put pen to paper lightly but the ignorance portrayed in that letter angered me.
  • I had to laugh when I read that correspondent’s question — it must have been tempting to respond “F… O..” in this modern age. Be interesting to see if they apologise!

Some of the other comments about the letter writer are too rude to publish. But he didn’t really bother me. He was entitled to ask about my credentials — even if he could have just read most of it on my website!

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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.