NZ Herald 3 December 2016

AYou make several excellent points — and one I’m not so keen on. More on that in a minute.

But first, I wrote last week about not tying up all your savings in case of an emergency, but we should add “in case you retire early” — whether because you want to or you’re made redundant.

On possible government changes, it would be surprising if a future government doesn’t raise the NZ Super age. The KiwiSaver withdrawal age automatically rises with that.

But such an increase would almost certainly be gradual — to not upset voters.

For example, the Commission for Financial Capability is looking at a plan that would start to take effect in ten years, with the NZ Super age rising in three-month increments. Current 55-year-olds would get Super at 65 years and 3 months; current 54-year-olds would get it at 65 years and 6 months; and so on, until current 48-year-olds and younger would get it at 67.

Retirement Commissioner Diane Maxwell will release some recommendations — which may include this proposal — in mid-December.

The current government has in the past rejected raising the NZ Super age. But a future government may well adopt this or a similar change.

There’s already an increasing tendency for New Zealanders to work past their 65th birthdays. So a gradual rise in the NZ Super age might not upset many.

Another possibility is that a government could force people to withdraw some of their KiwiSaver money as an annuity — with regular payments until death, rather than lump sum withdrawals. I expect, though, that there would be some flexibility. Baby Boomers are a pretty big voting force.

Still, your basic point — that future governments may be more likely to change KiwiSaver rules than laws affecting other investments — is valid.

And your final point, about diversification of savings, is also a good one. KiwiSaver providers are pretty closely monitored, but it’s still a good idea not to have all your savings with one institution.

However, I’m not so convinced that saving 3 per cent is too little for a comfortable retirement. It varies from person to person.

Beneficiaries often get a pay rise when they start NZ Super, because it’s higher than their benefit. One former beneficiary told me recently that she’s managing just fine on NZ Super, and doesn’t need withdrawals from the workplace pension she saved into before she became disabled. She’s used to being frugal.

Others, of course, would prefer a higher retirement income. But people who save 3 per cent in KiwiSaver from when they are young, and invest in a relatively high-risk fund — except when they will withdraw money soon for a first home or retirement — will probably retire with reasonable savings.

The more savings the better, you might argue. But that needs to be balanced against having enough money over the decades for higher education, raising a family, paying down a mortgage or growing a business.

AFair enough. And while we’re at it, if your taxable income is $14,000 to $48,000, paying off a 5.5 per cent mortgage is equivalent to earning 6.7 per cent on savings. If your taxable income is more than $70,000, it’s equivalent to earning 8.2 per cent on savings.

You can’t beat that with any investment that is — as you say — risk-free.

AA great idea. Last week’s correspondent could use either an offset mortgage, as you describe, or a revolving credit mortgage.

With the latter, you have your every-day money, mortgage and savings in the one bank account — with a large negative balance because of the mortgage. But beyond that, the two types of mortgage are similar.

If your every-day money is included, even if most of your income stays in the bank only briefly — before being spent on groceries and so on — it reduces your mortgage for a while, and therefore the interest you pay. And longer-term savings reduce your interest payments more permanently.

It’s not really correct to say your savings aren’t earning interest. Sure, the bank makes no interest payments. But by reducing your mortgage balance, your savings are in effect earning whatever the mortgage interest rate is, after tax — as discussed above.

Hard to get your head around? If your mortgage balance is $300,000 and your savings are $5000, you pay interest on only $295,000. Getting out of paying interest on $5000 improves your wealth as much as earning that interest on your savings.

With both offset and revolving credit mortgages, the interest rate is floating which, as you say, adds some uncertainty. But you can have just a portion of your mortgage in this arrangement — as you have — with the rest of the loan at a fixed rate. That might also curb fees, which are often higher on offset or revolving credit mortgages.

While most banks offer revolving credit mortgages, I think only BNZ, Kiwibank and Westpac offer offset mortgages. Last week’s correspondent might want to discuss her options with her banker.