- Unclaimed money may be yours!
- Options for couple retiring with $200,000 and no house.
- More on the index/active share fund debate — the theory and how it works in NZ
QThought your readers might find the IRD’s “unclaimed money” section of their website interesting to take a look at.
There are small and very large sums of monies unclaimed by way of bank deposits, insurance and salary/wages not claimed or activated for 6 years plus, of individuals, companies, non-profit organisations, non-residents etc. Maybe some are of deceased relatives?
I am sure there are many out there who could put the monies for their families and businesses to good use before time lapses and it in ends up in the Government coffers.
AGreat tip, thanks. Readers can check the list on www.ird.govt.nz. The easiest way to find the right page is to do a search, in the top right corner, for “unclaimed money”.
Inland Revenue has said it has a total of about $4.8 million — which is only a bit more than a buck a person. And many of the amounts on the list are pretty small.
But I saw one person listed there who has more than $55,000 due to him, and there may be others with more. It’s certainly worth a look.
If anyone comes across a sizeable sum owing to them, I would love to hear about it.
QThe implication of your reply two weeks ago to the couple who had reached retirement with $200,000 and no house is that they should borrow $100,000 (interest only) and buy a $300,000 house.
You said they should pay the interest for 10 years (let us say that that is $155 a week) and in ten years’ time take out a home equity release scheme to pay off the $100,000 and release them from the ongoing interest payments.
There are several reasons why this may not be the best option:
- To pay $155 a week ($200 before tax) is a large amount of money for a 65/61 year old couple. Even if they can find part-time work today, what about in 5 years or 10 years? If something happens to their income (sickness, redundancy, down turn in economy etc) they have problems.
- You do not buy a house (or share) if you may be forced to sell sooner than 10 years.
- Equity release schemes are an expensive form of finance.
- A couple at retirement with no house, with friends and family in Auckland and no assets other than $200,000 have to face reality and accept a big compromise.
What they should be talking about is buying a house/flat with a family member and living in the flat. Or building a $170,000 granny flat on the section of a family member, ie where they can put the money into the building not the land. On their death the family member has a source of future income (remember the family is supportive).
They should also be thinking about long-term renting, at least for the immediate future. In the current market they could invest the $200,000 to generate sufficient net income to pay a modest rent for three years, take on part-time work to build up more capital and assess the position in four years when the wife is 65 and can get a non-means tested NZ Super benefit.
Another possibility is taking on a caretaker/housekeeper role.
People who do not have enough resources have to be discouraged from doing things that expose them to real risks (not being able to service debt).
And if they have to take on debt, expensive forms of debt are the worst forms.
I agree that they should not move out of Auckland unless they have family out of Auckland. As they age, family becomes more relevant than friends.
AYou make some excellent points.
A lot depends on circumstances we don’t know about. Still — unless the couple’s family would be willing to step in and help if things go wrong — the $300,000 house plan may be just too risky.
It’s certainly true that retirement is not a good time to take on risk, as it can be pretty difficult to recover if luck goes against you.
It’s also true that the current equity release schemes charge pretty high interest. Nevertheless, they offer some people a chance to enjoy their retirement more than they otherwise could. And the fact that there are now several players in the equity release market should put some downward pressure on interest rates. Hopefully, in ten years, they will be pretty competitive.
In any case, I like your other suggestions, which might be excellent options for the couple, or others in a similar situation.
QRegarding the active vs. passive argument (in last week’s column), it can be shown that passive indexation will return the same as the dollar weighted average of all portfolios that contain the same stocks as listed in the index.
This is an important mathematical result. Indexation returns the average return of all portfolios that hold the same stocks, averaging the good and bad investment advisors.
If there is no justification for why a particular advisor should consistently outperform, then indexation is the way to go. Only if there are strong reasons why an advisor could consistently outperform (insider information for example) should one go with an actively managed fund.
AQuite. Other readers might follow this more easily through a simple example.
Let’s say an index that covers the whole share market has an average return of 10 per cent.
Mathematically, that must also be the average return of all the investors in the market.
If you invest in an index fund that invests in the shares in that index, you will make that average return, minus a bit for fees — albeit relatively low fees.
On the other hand, if you invest in an active share fund — which buys and sells shares depending on managers’ advice — theoretically you have half a chance of beating the index fund each year, and half a chance of doing worse.
In practice, though, because active funds must pay managers and trading expenses, their fees are higher than on index funds. After-fees, then, you have less than half a chance of beating the index each year.
Indeed, in the US in 2006, only 31 per cent of active funds that invest in large companies beat the relevant index, the S&P500, according to analyst Paul Kedrosky.
Over the years, different active funds take turns at beating the index. But over a decade or more — and you should be investing for that long if you are in shares — few active funds will emerge as over-all winners. And there’s no way of knowing in advance which funds they will be.
Index funds will hardly ever be best performers over a decade, but they are highly likely to be close to best — which makes them the best bet.
All of this would be turned on its head, as you say, if for some reason one fund manager could consistently do better than others. But if that is because of insider information, it’s illegal, and I doubt if the fund would get away with it for long.
There are, of course, other possible reasons for a fund to outperform the index. And that’s where it gets a bit complicated in New Zealand.
Many active fund managers compare their performance with the NZX50 index of our 50 biggest companies, or a similar index. But, as I said last week, those indexes are heavily weighted with Telecom shares.
Probably all active funds have fewer Telecom shares than an index fund based on one of those indexes. So, when Telecom performs worse than the market as a whole — as has happened in recent years — most active funds come out ahead of the indexes.
However, there are index funds based on indexes that are not Telecom-heavy, and those are the ones I recommend.
As I also said, some active funds invest heavily in smaller companies, and there is no New Zealand index fund that invests in smaller than mid-sized companies.
The smaller end of the market is less efficiently priced than the big end — meaning that it’s quite possible for fund managers to find bargain shares that are underpriced by the market.
Investors interested in the smaller companies, therefore, may want to invest in an active fund that specialises in that area.
Be warned, though, that smaller companies tend to be riskier. On average they have done very well lately, in a strong share market. But if the market turns — and inevitably it will at times — there’s a good chance smaller company funds will perform badly.
If you venture into that end of the market, do it with money you don’t need for 10, preferably 20, years. And promise yourself you won’t bail out in the meantime if the going gets tough.
No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.
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.