Q&As
Go, and have fun!
QI’ve been invited to a wedding overseas later this year and I would love to go. But, of course, it’s an expensive trip, especially when factoring in the loss of income for a couple of weeks.
Being in the classic asset-rich cash-poor category, the only way I can really do it is to extend a mortgage by $10,000 to $15,000 and let time soak it up. I’m 60 now so there is not much soaking time left if I don’t want to work till I’m 80.
The good news though is that the mortgage isn’t massive, and eventually we will probably downsize and the mortgage will be gone. I don’t like debt and this goes against the grain, but it’s the only option I can see.
AJust the other day a woman told me she was so glad she had read my encouragement to do fun things early in retirement — or in your case late in your working life. She and her husband now have health issues that limit their activities.
I’m not saying every new retiree should blow most of their savings on fun. There’s a happy medium. But it seems that many people are too cautious, and regret it later. What good is sitting around with hundreds of thousands of dollars in your dotage when all you want to do is watch telly?
And there are many ways people with assets can free up money later if they need to. Downsizing, or moving to a cheaper area, is one. But others include subdividing; taking in a boarder (perhaps an interesting foreign student); turning part of your home into a flat or Airbnb space, or selling a car, boat, jewellery and so on.
Also, while you’re reluctant to continue your current job until 80, more and more people are working past 65 — not necessarily full-time, and perhaps turning a hobby into a source of income. Finally, later in retirement there’s always a reverse mortgage.
The key point is that you “would love to go”. I reckon you should shrug off the debt and get on that plane.
Providers could do better
QThe lead letter in your column last week had a reader complaining that investment companies claim great things but the customer does not see it on their bottom line. I understand what he/she is saying.
We collected rentals as investments, but three years ago sold several for two reasons: the price bubble was unsustainable and sure to crash, and government policies increased costs and risks to the point that business became untenable.
So after paying the mortgages (yay, that felt good!), we had a healthy sum left and invested in two Fisher funds — Premium International, and Premium Property & Infrastructure.
Their reports were always optimistic, but within a year the value dropped nearly 20 per cent, and after three years the dollar value has just crawled back to where it was, although we are still losing because inflation has made a hole in the real value.
Now it is time to stop flogging a dead horse. The rental law changes make business viable again and there are property bargains everywhere. Let’s get back to owning something solid.
But the point is I agree with the first writer. Those award-winning Fisher investments lost real value while the reports talked of gains. My money would have been better in a bank account or even in cash under the mattress.
AThe horse is not dead. It’s just taking a nap. But still, I understand your point. Some fund managers, in an effort to put things in a good light, may be giving investors the wrong impression. That’s not okay.
I sent your letter to Fisher Funds, and a spokesperson replied, “Fisher Funds publishes quarterly updates for each of its funds, which provide general commentary about market movements. The global share market will always present peaks and troughs as seen over the last three years, and our commentary will always highlight this.”
Perhaps recent downturns weren’t highlighted enough for you. But at the risk of making you cross, it’s fair to point out that the Fisher website says your funds invest in volatile assets. For both funds, the suggested minimum time frame is ten years, and the funds are suitable for “A long-term investor who can tolerate volatility of returns in the expectation of potential higher returns.”
The ten-year time frame — which is what I also suggest for investment in property, shares or funds that invest in them — is because shorter-term downturns are fairly common. But over a decade a diversified investment will almost always rise, and probably by a fair bit.
It’s true the volatility in your funds has been unusually high lately. The Smart Investor tool on sorted.org.nz tells us the international fund returns over the last five years have swung from 4 per cent to 48 per cent (gosh), then minus 5 per cent, minus 11 per cent (a different sort of gosh) and most recently a healthy 34 per cent. And the property and infrastructure fund hasn’t been much more stable, with returns ranging from minus 10 per cent to 33 per cent. But you were warned.
Meanwhile, the property market has hardly shone. And I often wonder just how volatile a property’s value would be if we could record it day by day.
It would be great if you left at least some of your money where it is, giving these investments a chance. You could discuss this with Fisher Funds. “Our clients can talk to our team of experts to discuss whether they have the right strategy for their investment timeframe,” says the spokesperson.
You may, though, want to consider moving to similar funds with a different provider that charges lower fees. You can rank funds by fees on Smart Investor. Or you could try a less volatile fund, although average returns probably won’t be as high.
If you switch back to property, I hope it goes well for you. There are no guarantees there either, especially over the short term.
Meanwhile, fund providers, let’s have some plainer talk please!
Setting up gifts to grandkids
QA word of warning re gifting money to grandchildren’s KiwiSaver accounts. Two years ago my late mother (in her will) tried to gift her grandchildren and great grandchildren (21 in total) $11,000 each into their KiwiSaver accounts.
This ended up using a lot of legal time (ie fees) to authorise, validate and organise. And even then it only “happened” for half of them, and instead went into on-call accounts for the others. The banks couldn’t sort it out despite everyone having KiwiSaver accounts.
Sadly, the parents of the younger children (under 18) chose to “use/invest” the money themselves because they had control over their bank accounts! Maybe there is another way to gift that is more ring-fenced, inaccessible to looting parents, and less legal/admin intensive? My mother would be horrified!
AYou raise some worrying issues.
“This is a difficult situation given the potential for estate cost and for the estate to have to remain in place until the last beneficiary reaches the age of 18 years (or the gift age as provided in the will), and is eligible to receive the gift,” says Alison Gilbert, a partner at Brookfields law firm.
One option, she says, is to make the will provision very specific. “For example: I give the sum of $11,000 to my granddaughter Mary Jane Smith to be paid into her KiwiSaver account with ASB number xxxxxxx. If Mary Jane has changed KiwiSaver provider, I direct that this gift is paid to such new KiwiSaver provider.
“If the grandchild has no KiwiSaver, then the clause can provide for the executors, in consultation with the parents, to open a KiwiSaver for the grandchild, and on opening to then pay the gift sum into the KiwiSaver. Pending the opening of the KiwiSaver and payment, the executor is to hold the funds in trust.
“This would give the executors no leeway. The money could not be paid anywhere else. It would mean of course that this phrase would be repeated for every grandchild in this will.
“If the executors were unable to pay the funds into a beneficiary’s KiwiSaver account, as specified in the will, they should have retained the funds in trust until such time as they could make payment.
“Potentially, if there are many minor grandchildren and great grandchildren, each $11,000 fund would need to be kept separately on trust and administered. The costs of such administration would need to come from the income of each separate trust, or from the estate if provided for under the will. This would mean until such time as the last trust is paid out the estate would need to remain open, and ongoing costs would unfortunately be incurred.”
The message is clear: If you are planning to leave money to go into someone’s KiwiSaver account, check now if they are in KiwiSaver and, if not, urge them or their parents to open an account. There’s no obligation to contribute to it, so it could just sit there waiting for the bequest.
Be grateful!
QYour grandparent-of-eight last week must be comfortably off if planning to give away $400,000 to family. So whether they gift the money now, or hang onto it until they die, their assets are well above the level at which state-subsidized care would kick in. And rightly so: why should the state, essentially, support the grandkids of the wealthy?
Perhaps the grandparent should look at each grandchild on a case-by-case basis. Do they need the money now, not necessarily for a house, maybe for tertiary fees or travel, or could they wait a while?
And in the meantime, the grandparent should be grateful their assets are sufficient to fund their own care if necessary!
AYour comments seem a bit harsh, but it’s hard to argue with them.
Deposits versus PIE funds
QRecently a correspondent asked you whether bank PIE term investments were as secure as term deposits at banks. Your answer covered only the proposed deposit guarantee scheme — coming into effect next year.
I am over 80 and I have sold all of my rental properties because they were too much of a hassle and a very low return. I have around $3 million to invest by spreading it across the main banks so I have an income. I am very risk averse, so your answer about the security of a bank PIE compared to a bank term deposit is important to me.
AThe short answer is bank term deposits and term PIEs are equally safe.
The two products are structured differently. With a term deposit you invest directly in a bank deposit and earn interest. When you buy units in a bank’s term PIE, the money is similarly invested in the bank’s deposits. But your return is taxed at PIE fund rates, often somewhat lower than ordinary income tax rates. On average, the PIE return might be a bit higher than on a deposit, because of the tax situation.
On their relative risks, “while they’re structured differently, they have similar risk profiles,” says a spokesperson for ANZ. “We generally wouldn’t say that one is higher risk than the other.”
And from ASB: “Both are equally secure. ASB guarantees investments in both our term deposits and our ASB Term Fund.”
Both, then, are as safe as the banks that offer them. And a look at the Bank Dashboard on rbnz.govt.nz suggests the major banks are pretty solid these days.
As I said in the earlier Q&A, things are scheduled to change in mid-2025. Under the Depositor Compensation Scheme, if a deposit taker — a bank, building society, credit union or finance company — fails, the government will repay the money you lose, up to $100,000 per person.
The Reserve Bank says term deposits will be covered, and it proposes coverage of bank-sponsored PIE funds if they ”only invest in that bank’s New Zealand dollar deposits,” which is usually what happens.
In your situation, of course, the scheme won’t cover all $3 million. But, whether you’re investing now or after the scheme starts, spreading your money over lots of banks would help reduce risk.
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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.