This article was published on 20 July 2019. Some information may be out of date.

QI read with interest and sympathy the recent letter submitted by the folk planning to buy a home in Italy. I have a close relative who lives there and I have been there myself many times. Good luck to them — they will need it, and my cousin speaks fluent Italian!

I was planning to write and warn of the hurdles your correspondents face with the bureaucracy there, which is beyond that experienced here by a country kilometre.

Alas, I have to revise that estimate when it comes to our own civil servants. My eleven-year-old granddaughter has just received a letter from IRD advising her that they owe her four cents.

I am trying to teach her about why this has happened, but this is difficult as she is far beyond her years in the maths field. Her modest bank account’s interest must have been miscalculated by someone. I wonder will she receive it as a lump sum or will it be credited for future tax due?

I don’t suppose you can give her the necessary advice on how to deal with bureaucrats.

AOh no, we’re as bureaucratic as the Italians!

But perhaps we should be applauding Inland Revenue for treating children the same as adults, and respecting every refund, no matter how small. If kids were treated differently, that would open the door to all kinds of abuse of the system.

“Newborns are issued an IRD number when their parents register the birth,” says an IR spokeswoman. “While we write to a child directly, it is expected that parents or guardians will deal with their tax matters.

“Many children from a very early age are technically income earners for tax purposes — for example those whose parents have opened KiwiSaver accounts for them, established savings or investment funds, or made them beneficiaries of a trust.”

How will your granddaughter get the money?, I asked.

“If a refund is less than a dollar — 4¢, 50¢ or 77¢ — we don’t pay it out at that point,” says the spokeswoman. “Refunds from subsequent years are added to the balance until it is a dollar or more. At that point we will pay it out into a nominated bank account.”

As for advice on dealing with bureaucrats, I think your granddaughter might well learn from her granddad — keep a sense of humour.

QWe are a couple who have adequate retirement funds, and I personally welcome your logic last week on the set of rules for asset types and the three options on how to work out how much to spend in retirement.

However, at some point the rules conflict.

As an example, with assets of $1 million, and spending $1000 each week, that would give spending of about $50,000 yearly — over and above NZ Super.

That is all fine, but to have three years of spending — $150,000 — in cash, plus seven years of spending — $350,000 — in a bond fund getting current ridiculously low interest, is overcautious.

Also as time goes by the age factor creeps in and spending large amounts on travel or a vehicle is less attractive. So my answer is “No!” At some value of the asset base your rules no longer apply.

Disclosure: We have a home valued at $1.5 million-plus and share market-based assets of about $1.7 million. We have cash of never more than $20,000, but at least half of the remainder is quickly accessible.

I have recently scrapped our generous budget for travel because of age and instead “invested” $65,000 in a new fully electric car.

AI could argue that, with investments of $1.7 million, it doesn’t really matter much how you invest and spend your money. Unless you get caught up in a scam, or do something really rash, it seems you’ve got enough.

But you might as well do as well as you can with your savings. I’m sure you have family or charities you would like to leave money to.

First, a quick recap for readers who missed the last two weeks’ columns about investing and spending retirement savings.

I suggested you put the money you plan to spend within three years in bank term deposits or a cash fund, the money for four to ten years in a bond fund, and the money for ten-plus years in a share fund.

Every now and then, move money from shares to bonds and bonds to cash, to roughly maintain the three- and ten-year allocations. You don’t have to do this every year. Perhaps skip years when shares or bonds have fallen a lot, and catch up later. The plan is flexible.

I also gave three rules of thumb about how much of your savings to spend each year. You have zeroed in on the first one: If you retire at 65 with X hundred thousand dollars, you can spend X a week.

In your example, with $1 million you can spend $1000 a week, or roughly $50,000 a year. But, you say, if that means holding $150,000 in cash and $350,000 in bonds, that’s too much.

Let’s look at your own situation. You have just $20,000 or less in cash, and $1.7 million in shares. So under our rule of thumb, you can spend about $1700 a week.

How would you feel if the share investments halved in a year to $850,000?

In the 1987 crash, New Zealand shares almost halved, and by the end of 1988 they had more than halved. And in the global financial crisis of 2008, NZ shares lost 37 per cent. Drops this big aren’t common, but they happen every now and then, and there’s no predicting when.

What’s more, it might take a few years for the share market to get back to where it was. After the ’87 crash it took about ten years, which is why I suggest having ten years of spending money in cash and bonds.

If the market plunged, would you contentedly keep withdrawing your weekly $1700?

Within three months you would use up your cash and be selling shares at really low prices. If you kept spending at your old pace, you would be motoring through your savings, so they wouldn’t last nearly as long as you originally intended.

I bet you would worry, and reduce your spending. You might also give up on shares and move at least some of your savings into a bond fund, thus making more losses real. Being in a situation where you’re forced to sell assets at low prices is not a good strategy.

Still, if you could live with the above scenario, stick with your investments. You’re wealthy enough to cope.

The suggestion I made is for the majority of readers — who have much less in savings and much less comfort with risky investments.

There’s another point here though. Two weeks ago I said, “You can also gradually move money out of your share fund by not reinvesting dividends, but instead taking them as cash — as part of your spending fund. Some share funds will let you do this.”

With $1.7 million in shares, if you receive dividends averaging 4 per cent you could get $68,000 a year, or $1300 week, in cash. Then, when the share market fell, you wouldn’t be forced to sell many shares at low prices.

A few more things:

  • On your comments about spending less as you get older, many people say that. I think it’s fine if you don’t plan to increase your spending during retirement to keep pace with inflation — especially given that NZ Super currently grows by more than inflation.
  • But I wouldn’t plan on reducing your spending too much. Sure, travel and outings tend to decrease. But you might need money for medical costs or rest home care, or hiring people to do home maintenance or gardening that you used to do yourself.
  • Bond fund returns aren’t all ridiculously low. On the Smart Investor tool, have a look at the KiwiSaver defensive funds that invest largely in bonds. You can check their investments by clicking on Details under Mix. Several of those funds had average returns over the last five years of more than 3.5 per cent, and some more than 4 per cent, after fees and tax.
  • Note that those returns might not continue — especially if market interest rates rise. But over the long run, bond fund returns are not too bad.
  • Good on you for buying an electric car.

QEnjoy your column but wish the NZ Herald would make the picture smaller so we could enjoy more questions and answers.

AThanks for a flattering letter, but your idea sounds too much like more work to me! Besides I usually love the pictures the Herald chooses. They make the page much more appealing.

QLetter from BK Chiu, managing director of CDL Investments NZ Ltd:

(Two weeks ago, a correspondent wrote about her mother’s purchase of CDL shares in the 1980s. The mother’s investment — intended as a legacy for her children — had barely grown since she bought the shares. Mr Chiu’s long letter first covers the history of CDL and its predecessor companies. It then continues as follows.)

We have traversed this history because CDL Investments in its current form took shape in 1994 after the company acquired land holdings previously owned by Landcorp Corporation. CDL Investments is a totally different entity now, and in the 25 years since then, we have kept to our core business of residential land development. Our majority shareholder, then CDL Hotels New Zealand Limited and now Millennium & Copthorne Hotels New Zealand Limited. has stood by CDL Investments and recognises it as an important part of its group.

We are very proud of what we have achieved since 1994 when the key elements of our property portfolio were acquired. CDL Investments has been behind the creation of now-mature suburban areas in many parts of New Zealand, including Waimanu Bay (Auckland), Flagstaff and Magellan Heights (Hamilton), Northwood (Havelock North) and Morningstar Terrace (Queenstown) to name but a few. We continue to develop land in Auckland, Hamilton, Hawkes Bay and Canterbury and as you point out to your correspondent, we have done well over the past few years having increased revenue and net profit consistently.

This has been reflected in increases in share price over time with the price significantly higher now than it was say ten or more years ago.

Granted that the market may not have recognised our achievements in the form of a higher share price, but we cannot dictate what the share price will or can be at any time, and that is one of the aspects of a public company which investors must recognise when they buy shares as you mentioned.

We thank you for allowing us to take a look back at our very interesting corporate history and for the chance to put the record straight on a few important points.

AThanks for your letter, and I can understand why you wrote.

In the Q&A, I didn’t go into the reasons the share performed so badly last century. The point I was making is that it’s very risky to make a significant investment in any single share.

But I did also say, “CDL has actually had a good run over the last ten years. With dividends reinvested, it has performed well ahead of the average top 50 share, says NZX — despite declining in the last 17 months.”

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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.