Q&As
Retiring before 50? Volunteer!
QI’ve recently sold my business. I’m in my late 40’s and intend to be work optional.
After paying down significant debt I now have $9 million in residential property (of which $2 million is our own house) and $1.3 million in cash. I still have debt of $1 million over three properties. Overall, these generate $190,000 per year gross, and interest would generate $78,000 (6 per cent).
I understand property and, having seen the share market collapse of the 80s as a teen, with my parents getting burnt, I’ve put myself under pressure to make what I have work. I do know you shouldn’t put all your eggs in one basket (I’d probably be better off putting it all in term deposits) but I’m gun shy of anything outside property.
I know this will sound bloody ridiculous, but having this kind of wealth and the responsibility of making it work does not make me happy! What would you suggest?
AHalfway through your email, I thought, “Here’s another person who will make many readers cross because he is so wealthy, and doesn’t need financial help”. But then came your last paragraph. While some readers will respond, “Diddums”, and mutter about poor little rich girls and boys, I do indeed have a suggestion for you.
Get into serious volunteering, perhaps with several roles. You must have learnt plenty on your road to wealth. There must be organizations who could benefit from your experience and wisdom. And volunteers often report that they love what they do. If you try something and it’s not “you”, you can move on until you find a good fit.
Perhaps you’d like to help young people, or restore the local environment, or assist with raising money to support people with health problems. If you search “NZ finding volunteer work” you’ll find several websites to help you find a role that appeals and matches your skills.
You might also enjoy becoming a mentor to small business owners. Businessmentors.org.nz has information about this.
And you could apply to be an unpaid or low-paid director for a not-for-profit organization. The Institute of Directors offers courses on how to be a good director. And websites like appointbetterboards.co.nz list vacancies.
As far as your finances go, if I were you I would pay down your debt, as mortgage interest rates are usually higher than after-tax term deposit interest, even though you can now deduct the mortgage interest.
It would also be great if you got over the 1987 share market memories. That was a strange time, when many people were borrowing to invest in companies that were, in turn, borrowing to invest in other companies, making it all highly risky. These days, most people just go into something like an exchange traded fund, leave their money there, and watch it grow over the years — albeit with some wobbles. An investment like that would, as you say, spread your risk.
In some ways, it doesn’t much matter, as it seems you will never be short of a buck. But I like to imagine you one day giving substantial sums to some of the organizations where’ you’ve volunteered. And the more you can give, the better.
Please get back to us on how the volunteering is going.
Expected KiwiSaver returns
QI see you didn’t answer my question this week but I always hope for next week. I’ve rephrased my question hoping to get a clearer answer. Thank you.
I wonder if I should pay an extra $80 per week off my mortgage so I can retire mortgage-free at 65, or put it into KiwiSaver. I am in Booster’s Socially Responsible High Growth Fund. I know they’re paying 8.5 per cent expected returns, but my mortgage is 6.49 per cent fixed for two more years.
AIn most circumstances I think it’s better to pay extra off a mortgage than to invest the money — although one important exception is putting enough into KiwiSaver to receive the maximum from the government and your employer. That’s 3 per cent of pay for employees, and $1,042 a year for others. The extra employer and government contributions make KiwiSaver hard to beat.
However, once you’ve contributed at that level, I recommend tackling your mortgage. Reducing a 6.49 per cent loan improves your wealth as much as an investment with a 6.49 per cent return — after fees and tax.
Okay, your provider says its expected long-term annual return in your fund is 8.5 per cent before tax — probably close to your mortgage rate after tax. And the Smart Investor tool on sorted.org.nz shows your fund had average returns, after fees and tax, of 10.3 per cent over the last five years, compared with 7.77 per cent for the average aggressive fund. Sounds good.
But aggressive funds are pretty volatile. Your recent returns range from minus 2.76 per cent to 30.79 per cent. And don’t be too dazzled by that last number. In the extraordinary year ending March 2021, the average aggressive KiwiSaver fund rose 34.15 per cent, from a Covid-affected very low starting point.
When guessing how a KiwiSaver fund will perform in the future — and it really is a guess over short periods — it’s good to use the after-tax and after-fees returns Sorted assumes. They are:
- Defensive funds: 1.5 to 1.9 per cent a year — depending on your tax rate.
- Conservative funds: 2.5 to 3 per cent.
- Balanced funds: 3.5 to 4.1 per cent.
- Growth funds: 4.5 to 5.2 per cent.
- Aggressive funds: 5.5 to 6.3 per cent.
All those returns are lower than your mortgage interest rate. Note, too, that mortgage reduction is risk-free. And it gives you security. If you’ve made extra mortgage payments, you can often borrow that money back in a crisis. Psychologically, too, many people love to get the mortgage monkey off their back.
By the way, on your first comment, I receive many more questions than I can answer. One way readers can improve their chances is to avoid broad questions, such as “What should I do with my money?” And please try to stick to the 200-word maximum.
Give to my hubby, not beneficiaries
QI note your reference to the Retirement Commission’s 2019 recommendation of the auto-enrolment of all beneficiaries into KiwiSaver, with the Government making regular “employer” contributions of 3 per cent of their benefits, as a top up on current benefit payments.
Oh what a slippery slope it is when we describe a beneficiary’s employer as the Government, regardless of the fact that the word had quote marks around it in your item.
My husband has been a self-employed plumber for 45 years and has been contributing to KiwiSaver for about 15 years. He has never received an employer’s contribution. I would like to see self-employed people get a fairer deal when it comes to KiwiSaver. Not beneficiaries.
AOooh, where’s the kindness? I would like to see both, actually.
The Te Ara Ahunga Ora Retirement Commission’s June report on KiwiSaver Opportunities for Improvement recommends an increase in the government contribution to people who don’t get an employer contribution, including the self-employed.
That’s a good idea, but I don’t think it’s as important as helping beneficiaries feel part of mainstream society, with a future to plan for, as I said last week. There’s no slippery slope. The government can put the brakes on anywhere at any time.
When is a break not a break?
QLast week you referred to the upcoming “tax breaks”. It is important to be precise rather than being ignorant or spreading falsehoods, as some journalists and politicians do — although I am not saying that you are ignorant or spreading falsehoods. I do have the highest respect for you. But the government is making a threshold rate adjustment. They are not changing tax rates.
Secondly your suggestion for the government to contribute 3 per cent to KiwiSaver for beneficiaries has a superficial kindness about it. But your answer points out a problem in that this will be counted as a cash asset once they are 65, for some benefit entitlements.
Surely any government would be better to focus on education and training and trying to provide a stable political and economic environment, whereby the economy could grow and good jobs could be found.
AI’ve previously written that the tax breaks are adjustments to the thresholds. For example, taxable income of $1 to $14,000 is currently taxed at 10.5 per cent, but that changes to $1 to $15,600 from July 31. That, and similar changes to the higher thresholds, give almost every taxpayer a tax break. I’m sticking to my words!
On government KiwiSaver contributions for beneficiaries, a person’s gain from that would almost always outweigh the possible loss of some benefits after 65. From that age they would be eligible for NZ Super, as well as having KiwiSaver savings — in many cases including contributions while working before and after being on a benefit. Most wouldn’t need further government money.
I doubt if anyone would argue with a government focus on education and so on, but there will always be people who, for a period in their lives, need government assistance. As Investopedia puts it, “Many modern economists agree that some unemployment is necessary to avoid inflation and to allow workers to move between jobs, pursue education, or improve their skills. Unemployment of 5 per cent or lower is often considered full employment in a real-world context.” And what about people on benefits because they have health problems?
Another way to help parents
QI thought I’d respond to the ‘Declare rental income’ item last week. I’m wondering if this couple sought advice from a chartered accountant and solicitor first, as there may have been a better approach.
If the parents’ small mortgage was, say, $100,000 before their “children” bought their house then, with the children borrowing $800,000, I’m assuming the mortgage was repaid, and that the parents now have a chunk of money in the bank?
If the parents place, say, $700,000 in term deposits, then the margin between what they will receive versus what the mortgage is costing the children would be at least 1.5 per cent (actually higher if we include tax). So the family could be, say, $10,000 a year worse off to the benefit of the bank.
An option could have been for the children to borrow, say, $150,000 to pay off the mortgage and provide a little extra cash for the parents’ comfort, and leave the house in the parents’ name. The cost to the children of the loan could eventually be recognized via wills. This is essentially achieving the same as a reverse mortgage but within the family and cheaper.
I would still encourage this couple to seek accounting and legal advice to see if there is a way it could be structured better (e.g. parents lend a chunk of their cash funds back to the children so they can repay a decent amount of their loan, and again deal with things via a family arrangement).
AGood thinking — which is not surprising given you’re a chartered accountant!
Last week’s Q&A was looking at the couple’s tax situation, but why not look at the whole set-up and consider better ways to do it? Others considering similar moves might want to take up your suggestion of seeking expert advice first.
Guaranteed “Lotto” win
QI have enjoyed reading the comments on Lotto recently. My wife and I win $10 every week without fail, and our friends can’t understand how we do it. We treat ourselves to something we normally wouldn’t do or wouldn’t buy with the winnings, which are put in a jar until we decide on the treat for that week or month. How do we do it? We put the $10 in the jar rather than in the Lotto counter till.
AGood on you. You had me tricked there for a while!
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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.