NZ Herald 20 June 2009

AYes I am. And what a pity you didn’t happen to read that advice a few years ago. You might have kept at least some of your savings out of the finance companies — which were clearly not offering high-quality investments — as well as out of a share fund.

But — as our mothers used to say — there’s no use crying over spilt milk. And in any case, things are not as bad as they might seem.

What should you do now? Firstly, decide how much of your nest egg you plan to spend within the next ten years. Let’s say you are 60 now, will retire at 65, and expect to live until 85. You may well live longer, but many retired people decide that if they make it past 85 they will manage on NZ Super after that if their savings are all used up.

Keeping things simple, we’ll say that you’ll plan to spend a quarter of your retirement savings from age 65 to 70 and the other three-quarters from 70 to 85. With any luck, your investment returns on the money for those later years will more than keep up with inflation.

That means you’ll be spending only about 25 per cent of your nest egg within the next ten years. I suggest you move that money — including any further savings before retirement — into high-quality bonds. A good stockbroker will give you advice on which ones to buy.

What about the rest? If you have the stomach for it, it’s not silly to leave at least some money in the Fisher fund or perhaps another share fund. Over ten years or more, there’s a pretty good chance it will regain lost ground, and perhaps more.

As it happens, in the last three months New Zealand share funds have grown really well, with the Fisher fund a top performer. Over such a short time, that means nothing. I actually strongly disapprove of keeping track of how well funds perform over short periods, for fear that people will switch to the top ones. Research shows no tendency for funds that have performed well to necessarily keep doing so.

But I just want to point out that we have no idea where share markets will go and when — other than trending upwards over the long term.

I suggest, though, that you put some of the money in an international share fund, to get more diversification.

If you would rather reduce your risk, you could water down your portfolio by also putting some of the longer-term money into bonds or a bond fund.

Every year or two, transfer some of your money from higher-risk to lower-risk, so that you keep whatever you plan to spend within ten years in bonds. Once you get within about two years of spending it, move that money into what’s called cash — generally bank term deposits.

Some people think this strategy is boring. But given what you’ve been through, you are probably happy to be bored. I’m sure you can find other ways to spice up your life.

AGosh, what a contrasting experience to last week’s man, who has had hundreds of tenants over 25 years with no problems. I wonder what makes it all work so well for some people but not others.

Good luck with whatever your next plans are.

AIt certainly is at first. But not in subsequent years. This can be a bit confusing, but it’s worth making the effort to understand it.

Until April 1 of this year, most employers contributed less to KiwiSaver than their employees, which is why I used the numbers I did in last week’s example — which was for someone who has been in KiwiSaver virtually from the start.

But, if we’re going to look at this in more depth, and apply it to the future, let’s get up to date.

Since April 1, when employer KiwiSaver contributions rose to 2 per cent of pay, if an employee also contributes 2 per cent and the government adds its tax credit, the total return on the employee’s contribution in that year is well over 100 per cent.

And for a non-employee contributing up to $1043 a year, the tax credit doubles it, so they also get 100 per cent on their contribution in that year. In both cases, the investment return on the money will boost the return further — assuming it’s a positive return, which will usually be the case.

Next year, the same thing will happen again to new contributions. But not to the money already in the fund. That receives no new boost from the employer or the government. It simply earns the investment return from then on.

As the years go by, there will be much more “old” money in your KiwiSaver account than the current year’s new money. If, for instance, your account totalled $200,000 and you put in $5000 from yourself, $5000 from your employer and $1043 from the government, the extra money from the others wouldn’t give you anywhere near a 100 per cent return on the whole account.

There are two ways to view what happens:

• On each year’s contributions you receive a return of more than 100 per cent in the first year and then the investment return from then on.
• Instead of concentrating on what happens to new money, concentrate on the fact that the total contributions that have ever gone into your account will — in most cases — be at least twice what you put in, and more for employees. Over the years, then, you can at least double the investment return when considering how well your own money has performed — as in my example last week.

I think the second way is easier to understand.

While we’re on KiwiSaver, some concerns were expressed this past week about some KiwiSaver providers.

I find it hard to imagine the money in any KiwiSaver account disappearing. But if you’re worried about your provider, you can easily move to another one. All you have to do is contact the new one. They will arrange to move your money from your old provider, and tell Inland Revenue.

Only two KiwiSaver providers charge an exit fee for leaving them. They are Grosvenor, which charges $30, and Staples Rodway, which says it may charge up to $25 if the member leaves within two years of joining. Gareth Morgan KiwiSaver says it may charge a $50 exit fee after 1 July 2010.

No provider charges an entry free. So moving provider will usually cost you nothing.

AEmployed people’s KiwiSaver contributions are a percentage of their pay, so their contributions will automatically rise as their pay rises. Given that over time most people’s pay goes up faster than inflation, they should be okay.

For the others, I generally suggest all non-employees except those under 18 try should contribute $1043 a year, to get the maximum tax credit. There’s no provision for increasing the tax credit over time, although a future government might do so.

In the meantime, there’s nothing to stop someone from putting in more than $1043 — perhaps increasing it by 5 per cent a year. The downside is that the money is tied up, usually until the person buys a first home or reaches NZ Super age. But many people won’t mind that.

For under 18s, I think it’s great if the kids make 2 per cent contributions from any pay they receive, to get in the habit. But because they receive no tax credit, I’m not sure KiwiSaver is the best way for parents to save on their children’s behalf. Another account — which could be accessed for tertiary education, setting up a business or other expenses — would be more flexible.