This article was published on 20 June 2009. Some information may be out of date.

Q&As

  • No use crying over split milk: Investor can still make use of 10-year rule
  • Not all landlords have a dream run with their tenants
  • How KiwiSaver returns are boosted
  • Do KiwiSaver contributions need inflation-proofing, and if so, how?

QYou said in a recent column, “I’ve said so many times that I feel like a broken record: If you are within 10 years or so of spending your savings, move it out of shares, property and other risky assets into high-quality bonds and cash”.

I am within five years of retirement and my nest egg has lost half its value in the last year or so. Apart from my losses in Bridgecorp and Nathans Finance, I was persuaded by a friend in 2007 to invest in a company with a very good track record (at the time) called Fisher Funds.

I knew that their NZ Growth fund was a long-term investment and that I could expect some volatility along the way, but I didn’t imagine for a moment that it would lose over half its value.

Are you suggesting that someone in my situation still follow the advice quoted above?

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.

QIn response to the happy landlord in last week’s column, in 1975 I had 52 flats and houses. My wife did the paperwork and I looked after the maintenance with occasional help for cleaning. Since than matters have changed, and I am down to 14 flats, only four of which are occupied.

Like many other Landlords I discovered during the last few years that it is less expensive to have the units vacant than occupied. The damages and the uncollectible rent owing causes the flats to be uneconomic.

This fact makes them unsalable except for giving them away. I am working hard on finding an alternative use.

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.

QI was interested in the example you gave the last questioner in last Saturday’s NZ Herald.

In your example of a KiwiSaver with $5000 of member contributions, $3000 of employer contributions and $2000 from the government, you suggested a 3 per cent return on $10,000 became 6 per cent if you looked only at the $5000 in member contributions.

In fact, isn’t the return on the member contributions in excess of 100 per cent, because the account balance of $10,000 arises from only $5000 of member contributions?

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.

QWhat arrangement or facility is available to my 100 plus KiwiSaver clients to inflation-proof their Kiwi-Saver contributions?

There is a mixture of employed, self employed, not working and under 18-year-old minors. All other investments in my care have an automatic 5 per cent indexation.

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.

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.