NZ Herald 3 February 2024

AI agree that tax dodging is selfish and unfair.

Many New Zealanders have little control over how much tax they pay. Their employment income is taxed through the PAYE system, their bank interest is taxed when the money is paid, and their KiwiSaver provider takes care of tax on their savings. And it’s the same for older people whose sole income is NZ Super and perhaps withdrawals from bank accounts, term deposits, KiwiSaver or similar investments.

But many others, including sole traders, business owners, and more sophisticated investors, must file tax returns that to a considerable extent rely on honesty. And most of us have come across people who brag about not declaring all — or sometimes any — of their income. Or they might exaggerate their deductions.

And there must be many others who don’t talk about tax dodging, but still do it.

Then there are those who hire accountants to come up with sophisticated ways to pay less tax. Some high-priced tax experts have told me they look upon tax minimisation as a challenge. If the government is stupid enough to write legislation they can work around, it’s fair game, they say. But is it really fair?

I’ve heard people justifying fibbing about taxes by claiming they get less than their fair share back from the government, because they don’t use many services. My response: You are one of the lucky ones — probably either healthier or wealthier than most. That’s all the more reason to contribute.

So what can stop this? One accountant I know says to clients who come to him with tax-dodging ideas, “Okay. When you leave here, you’re going to drive along the street. Who paid for that street? And if someone drives into you and injures you, who will pay for the police to check out the accident, and the hospital care you’ll need? And who pays for your kids’ schooling? No, I won’t help you with that plan of yours.”

Maybe more tax advisers could similarly shame their clients. Or maybe tax cheats could shame themselves. Next time you look in a mirror, ask yourself whether you are a contributor or a bludger. If it’s the latter, do you feel good about it?

AI did say last week that the two important rules for DIY share investors are to buy and hold, rather than trading shares, and to “own quite a few different shares, so a disastrous one is not a big deal.”

But your letter underlines that second point, and it doesn’t hurt to emphasise it. In many investments you can lose some money, if the markets turn against you, but you don’t end up with zero. But in shares, or corporate bonds for that matter, you can lose the lot if the company goes belly up.

Meanwhile, of course, the value of other shares you own might soar. Over time, if you own a wide range of shares, you nearly always do well. But letting one share, or for that matter one industry, dominate your portfolio is playing with fire.

AYou’re responding to the mention in the last column that 2,000 pounds in the 1950s is $4,000 in today’s currency, because New Zealand switched to dollars in 1967. Those of us around then will remember the endless ads that ended with the jingle, “On the tenth of July, next year,” and then later “…this year”. Younger readers: ask an oldie. I bet they will be able to sing it to you!

The change was a big deal at the time, and took some getting used to. But those of us who had wrestled with dividing 5 pounds, six shillings and threepence by 7 in primary school were not sorry to see the old currency die out.

And nobody was ripped off. You could buy exactly the same groceries with your new dollar as your old ten shillings. It is irrelevant whether the unit of currency was divided into ten or twelve smaller parts. And by the way, you could get quite a few groceries for a buck back then — the same as what $22 would buy now.

Sure, if you had an uneven number of half pennies, you would lose out on one of them. But that left nobody broke.

AThe rule of thumb I wrote about last week is rough. If you want more detailed rules, with answers to your questions about assumptions, you can read a Society of Actuaries report here.

The report is just nine pages, and written for non-experts. It lists the following four rules that you could use for retirement spending. They apply to people retiring at 65 and investing their savings conservatively through retirement. Each year you can spend:

• Six per cent of your starting savings total. You’ll have less to spend each year because of inflation — but many people find they spend less as they get older anyway. With $100,000, you could spend $115 a week. Risk: you might outlive your savings.
• Four per cent of the starting value, but then adjust the spending each year for inflation. With $100,000 you could spend $77 a week at first, but rising each year.
• The current value of your savings divided by the number of years you want the money to last. With $100,000, and the money lasting from 65 to 90, you could spend $77 a week at first, but that would change each year as your savings total changes. There’s no risk of your savings running out before 90.
• The current value of your savings divided by your then current life expectancy. With $100,000, and a life expectancy of 21 years for a male at 65, you could spend $92 a week at first, but that would change yearly. Your savings would last all your life.

After I had read these rules, which were published in 2020, a reader suggested the “$100 a week for $100,000 saved” rule. When I saw that it’s in the ballpark of the rules above, I thought it was useful to use in the column because of its simplicity. But for those who want more detail, I recommend the Society’s report.

The paper also lists ways you can increase your retirement income — by retiring later, increasing your investment risk from conservative and therefore probably letting your savings grow more, and so on.

On your question about couples with different ages, you could use the third or fourth rule above, with the younger person’s life expectancy or years to age 90.

AThe Society of Actuaries, and probably most other experts, don’t make an allowance for that sort of spending, as it’s unknowable and hugely varied. You just have to budget for the extras, by not spending your total “allowance” during the good years — in the same way as you would at any other age.

Also, your spending on luxuries like travel and dining out could vary depending on how many bad surprises happen. More on money in retirement next week.

AYou’re referring to a Q&A in the final column of 2023, about a couple in their 90s who discovered there was $15,000 of insurance money coming to them that they had long forgotten about.

I suggested that other readers check this page on Inland Revenue’s website to see if there is similar treasure awaiting them.

Examples of money that might be sitting there include: money in banks or insurance companies that have lost track of the owners, holiday back pay from an employer, victim support payments, royalties from something you created years ago, overpayment of bills, money you have inherited — and much more.

So far, nobody has let me know they found money there. Disappointing. Let’s hear from you if you struck gold, or even a few dollars. The world won’t know who you are, I promise.

Keep It Short!

I keep receiving more and more letters for this column, which makes it harder to choose which ones to answer and publish. At the bottom of the column it says, “Letters should not exceed 200 words,” but I’ve always been flexible on that. From now on, though, I will be more likely to favour shorter letters.

Also:

• I prefer specific questions, as opposed to, “Here’s my over-all financial situation. What could I do better?”
• I would love to hear more from younger readers and people on lower incomes or with lower than average wealth.