NZ Herald 3 March 2012

AThere’s no need for you to ever own your own home. But if you don’t, it’s best to have a lump sum at retirement to cover your rent until you die — or to buy a home later if you change your mind.

Generally, retirees who have their accommodation taken care of — either through a mortgage-free home or savings for rent — can do okay living on NZ Super, with no other savings. But those still making big mortgage or rent payments tend to struggle.

How much do you need for rent in retirement? Let’s start with how long you expect to live. As a healthy male, and especially if your parents didn’t die young, you might guess at 90 — knowing that if you live longer than that, NZ Super will probably cover your expenses. Older retirees don’t usually spend much.

So, if you retire at 65, let’s say you want to fund 25 years of rent. Multiplying your current rent, at $13,000 a year, by 25 brings us to $325,000. Funnily enough, at your saving rate you will set aside just a bit more than that — $337,000 — in the next 12 years.

But hang on a minute — I’ve ignored the following: rents will rise with inflation; your savings will earn returns and grow before retirement; and your rent fund will also earn returns throughout your retirement.

The tidy part is that that should all come out in the wash — if we assume that rents rise at about the same rate as after-tax, after-fees returns on your savings. And you have a buffer, in that your pay — and therefore your ability to save — is likely to increase.

Keep in mind, though, that we’re assuming the following:

• You will be content to live in retirement on NZ Super. Currently it appears that you spend roughly $40,000 a year after tax, rent and savings. That compares with about $17,700 in NZ Super, after tax, if you are single and living alone, and $16,300 if you are sharing.
• If you live past 90, you’ll manage to cover rent as well as other expenses on NZ Super.
• Your rental situation continues to work well. If not, you may have to pay considerably more.
• Everything else goes smoothly. What if you have health problems, lose your job and can’t find another one, or want to support a family member in difficulties?

Our scenario is hardly generous. If you would like to be in a stronger position, there are a couple of ways to do this.

One is to increase your rate of saving — and not just proportionately when you get pay rises. You might, for example, boost your savings by $50 each fortnight.

Another is to invest into something riskier, perhaps a share fund. Its value will fall sometimes, but that’s not the point. Over the longer term, it will probably grow considerably faster than term deposits. What’s more, investing in shares protects you against inflation eroding your savings. In that sense, shares are less risky than term deposits.

If you feel nervous about shares, you could start with $1000 a year for a few years. If you become comfortable, then you could review your strategy. If not, you could sell them without being exposed to much risk.

To the extent you want to stick with bank term deposits, I suggest you keep an eye on different banks’ rates — perhaps via www.canstar.co.nz or www.depositrates.co.nz or www.interest.co.nz. Also, stagger the terms, so that you have some maturing in, say, six months, some in a year, some in two years and so on. That way you won’t have a whole lot tied up if interest rates rise.

One final point: If you are not in KiwiSaver, make it part of your savings plan, to get your share of government and employer contributions. You could, perhaps, invest your KiwiSaver money in a higher-risk fund. That could help you to learn about investing in shares.

A…even if it makes you a bit cross sometimes?

Last week’s correspondent probably used the wrong words. You’re quite right that you don’t have to pay back a student allowance, it’s a gift from taxpayers. You’re also right that to get that allowance your parents’ income has to be less than about $83,000 (or about $90,000 if the student lives away from home) — assuming the student is aged 18 to 23 and has no children.

But when we look at student loans — which certainly are repayable — there are three parts: compulsory fees, course-related costs and living costs. I bet the correspondent was referring to a loan to cover living costs.

That still raises the issue of whether it’s ethical to take out a student loan when you don’t need it. Because student loans are interest-free, they are subsidised by taxpayers. The government provides the money now and doesn’t get it back until later. And the recently introduced repayment bonus is a further subsidy.

I’m torn between saying to students, “You shouldn’t take advantage of these subsidies if you can get by comfortably without them,” and “You are legally entitled to a student loan. Go for it.”

In a way, it’s not that different from questioning whether well off people should join KiwiSaver, which is also subsidised by taxpayers.

In the end, I think, it’s up to the government to set up a more targeted system if they want only certain people to use student loans.

ASounds like a quite a hassle. But there’s no way around it.

“It’s important for clients to tell us if they have lived overseas when they apply for NZ Superannuation,” says Merv Dacre, general manager senior services at the Ministry of Social Development. He confirms what you say, that applicants are required, by law, “to take all reasonable steps to apply for any overseas pensions for which they may be eligible.”

Once it has been established that you are eligible for an Australian age pension — or any other overseas benefit or pension that is administered by or on behalf of an overseas government — the amount of the overseas benefit or pension is subtracted from your NZ Super, says Dacre. “In effect the total amount of your overseas pension and your reduced rate of NZ Super is equivalent to the maximum rate of New Zealand Superannuation.”

He does seem to have some sympathy for you. “We understand the process for Australian pension applications can be complex. However, the forms are issued by the Australian agency Centrelink, which delivers health, social and welfare payments and services. In general, Centrelink require more information when applying for Australian pensions as they are income and asset tested whereas NZ Super is not.”

For more info, go to tinyurl.com/austpensions.