- Where to put your money if you’ve lost faith in all financial assets
- Why being in a balanced fund isn’t always equal to being in both low- and high-risk funds
- Suggestion for last week’s couple unable to buy a home because of his parents’ mortgage
- Tax on PIEs and uneven tax burden
QI am 68 and my wife, 66, and we have recently retired. We have just sold our home, and purchased in a small town on Auckland’s fringes.
We will have $350,000 from the trade-down transaction. We also have $80,000 in term deposits.
We have a pessimistic view about the future of financial assets. Even gold or silver. We are also worried about the stability of banks and negative interest rates.
So our problem is: which physical assets could provide an income stream and/or good backup for tough times ahead? An example might be a large vegetable garden, as our property-to-be is one third of an acre.
We want to do this relatively quickly. We do not want to be caught out by financial after effects from the COVID19 lockdown.
We would appreciate your advice on our nervousness around financial assets, as there may be other readers sinking in the same boat.
AThe boat might be heading into a storm, but she’s a seaworthy vessel and won’t sink.
Your letter must be one of the bleakest ever sent to this column. Things are not that bad — honestly.
At first glance the answer to your question would seem to be cheap rental property. But houses in good shape aren’t cheap enough, even in the countryside. And while you would receive rent — hopefully — you would be tying up your savings in an asset that’s likely to lose value, at least over the next year or two. Even if the value later grows, you can’t spend that money.
The vegie garden idea is good, plus some fruit trees. If you are keen gardeners, you could grow some interesting varieties to feed yourselves and sell at a local farmers market. You might also buy hens and perhaps even a cow for milk and cheese.
You could also look into solar energy, and read up on how self-sufficient people manage without using money. But it will be a challenge.
What do most retired people spend on? According to Massey University’s Retirement Expenditure Guidelines, two-person households living outside “metro” areas spend most on housing and household utilities, which for you would include rates, maintenance and energy — if you are not DIYing the energy.
Next comes food, which we’ve already discussed, and transport. Would it be feasible to use bikes or e-bikes? Then there’s recreation and culture, which is obviously spending that is very shrinkable.
We could go on, but it’s probably best if you check the guidelines to see what applies to you. The report is at tinyurl.com/RetSpending. Appendix 1 is a list of weekly spending for one and two-person households in metro and provincial areas. It’s also broken down into No-Frills and Choices spending — with the latter obviously including more luxuries.
I don’t see how you can avoid needing at least some cash, for things like rates. And that means parking some of your savings, for future spending, in some kind of investment.
You could choose something like art or collectibles, but it seems to me that they are sitting there waiting for those who don’t really know what they’re doing to be ripped off by those who do know.
So let’s look at whether the main financial assets — shares, bonds and cash a.k.a. bank term deposits — are really in such dire straits.
Shares plunged in March, but have since recovered more than half that fall, in both New Zealand and overseas. In New Zealand, the NZX50, is now back to where it was in late November. And the MSCI world share index is back to levels seen last August.
Still, nobody knows where shares will go next. I don’t like my chances of talking you into a share fund investment. You could use a bond fund, which would be somewhat less risky, but it would still have its ups and downs.
In the end, given your worries, you should probably stick with bank term deposits. I know you’re concerned about bank stability. But take a look at the Reserve Bank’s Financial Strength Dashboard, which I wrote about last week. Our banks don’t seem to be at death’s door.
What about negative interest rates? I’ll be writing about that next week. But in the meantime I wouldn’t get too worried.
Another option, of course, is to put cash in a safe or safety deposit box. But make sure it’s theftproof, waterproof, fireproof and rat-proof.
QIn your last column, a Simplicity spokesperson said you can have multiple funds with different risk profiles but questioned whether it would make sense.
You often advise having money in low to high risk funds depending on the time frame for when the money is required.
We are in our mid-fifties with most of our money in higher-risk funds (Kiwisaver and non-Kiwisaver, low-fee index funds) and some in lower-risk funds (an alternative to term deposits) and cash. I’m aware we should be looking at gradually shifting more towards medium/lower risk as we get older.
Your columns indicate many people have several different risk funds, for various reasons.
So would it make sense to have most money in one balanced (or whichever is most appropriate) fund instead of constant juggling with several? Surely this would have the same end result?
AThe Simplicity spokesperson last week was talking about whether it would make sense to be in five different types of funds. It would be hard to justify that many.
But there are several reasons for being in more than one fund, in or out of KiwiSaver:
- You’re transitioning into a higher-risk fund to get higher average returns over the long run, and you can cope with volatility. But it’s better not to move all the money at once.
- You’re transitioning into a lower-risk fund because the time you plan to spend the money is getting nearer, or you’ve realised you can’t cope with high volatility. Again, a gradual move works better.
- You’re trying out a higher-risk fund, but with just a portion of your money at first to see if you can cope with higher volatility.
- You’re planning to spend some but not all of your KiwiSaver money on a first home, within the next ten years. So you have that money in lower risk, but the rest in higher risk to get the greater long-term growth.
- Perhaps the most common reason: in retirement, you want your short-term spending money to be in low risk, your medium-term money in middle risk and your long-term money in higher risk.
The first three reasons apply just for a while — perhaps a few months. And I’m sure you can see why having all your money in one fund wouldn’t work in those situations.
But the last two reasons might apply for years. So why not just average things out and hold all your money in a medium-risk balanced fund?
The answer depends on your spending plans. Here’s the golden rule: Don’t expose money you expect to spend within the next three years to the risk of a share market downturn.
Let’s say you’ve ignored the rule, and all your money is in a balanced fund. You’re about to withdraw some to buy a home or spend in retirement. About half the investments in your fund will be shares, and if the share market has fallen recently, your withdrawal is the equivalent of selling shares at a low price. Not good.
If, instead, you had some of your money in a high-risk fund and some in low risk, you could make your withdrawal from the low-risk one. Sure your high-risk investment will have fallen in the downturn, but you’re not touching that money for years, so it has time to recover.
So where are we? If you’re saving for retirement several decades away, having all your money in a balanced fund will bring you much the same results as having half in low risk and half in high risk.
But if you plan to spend some of the money sooner, use more than one fund.
To work out which risk level is best for you, go to the KiwiSaver Fund Finder on sorted.org.nz and click on “Find the right type of fund for you” on the left side.
QI know a couple (now married) who couldn’t get a joint tenancy mortgage because he was an undischarged bankrupt. She, alone, bought a property (with a mortgage), and his lawyer ensured there was a watertight pre-nup protecting his interest in the property.
Perhaps this is a way of getting your correspondent off the debt treadmill.
AYou’re referring to last week’s first Q&A, in which a young couple are struggling to buy a house because of the man’s involvement in his parents’ mortgage.
Your idea is not a bad one. But it would stop him from possibly taking advantage of first home help through KiwiSaver. And her income would have to be high enough to get the loan on her own.
Also, ideally two members of a couple have equal interest in their home.
I would rather see the couple sort their situation through the steps suggested last week. But thanks for writing.
QThank you for publishing my letter in your column last week. However, no thanks for the dig at accountants’ “fascination” with tax. It appears that in this year of “being kind” you may have taken the day off!
Taxpayers using incorrect PIE rates is a big problem that IRD has been actively policing. If you use a PIE rate that is too low you can be subject to penalties. If you use a rate too high you cannot get the tax back. It is a lose-lose situation for those not paying attention.
My apologies for the adding error. Clearly the 70 per cent figure should have read 80 per cent. It is a shame you chose not to correct the error as it did highlight how the top 20 per cent of taxpayers pay 80 per cent of the tax.
AAgain I’m starting my reply to you with, “Oh dear”. One person’s gentle tease can be another person’s taunt. Sorry if I was unkind.
You’re right that the taxation of PIEs seems unfair. However, after a kerfuffle last year when Inland Revenue told 120,000 people they were paying too little tax on KiwiSaver and would have to pay more, the department is at least now trying to be helpful.
It says on its website, “If you’re enrolling into KiwiSaver for the first time we may let you and your scheme provider know what we think your prescribed investor rate should be. We base this on the income information we have in your myIR account.”
This service, plus the publicity last year, hopefully mean most people are now paying the correct tax on their KiwiSaver income.
The fact that just 20 per cent of taxpayers pay 80 per cent of the tax is indeed noteworthy. That latest numbers I can find, from Treasury, say the top 20 per cent actually pay 64 per cent of tax, but you might be using a different definition of tax.
Anyway, the situation is because we — and most countries — have “progressive” tax rates. For example, people earning less than $14,000 a year pay 10.5 per cent on each dollar earned, while higher-income people pay 33 per cent on every dollar they earn over $70,000.
I’m comfortable with that, but not everyone is. Unhappy people might want to recall that back in the 1980s the top tax rate was 66 per cent, so the imbalance would have been much greater.
How to make use of new info on KiwiSaver statements
The most important information in the annual statements KiwiSaver members have recently received may not be how you fared in the recent sharemarket downturn.
For the first time this year, providers have been required to give most members two numbers that have much greater long-term significance:
- An estimate of your KiwiSaver savings when you reach 65.
- How much you’ll be able to spend in retirement from those savings.
If you switched provider during the year ending March 31, you won’t get the projections this year, but you should do next year. Others to miss out are people who were under 18 or over 65 on March 31. But everyone else should find the information on their statements.
All providers calculate their numbers the same way, using government rules. The following are some points to note about the projections.
Neither the government nor your provider is guaranteeing you’ll have the projected totals. They are just estimates.
Inflation Allowed For
Both numbers are adjusted to remove the effects of inflation. So if you’re told that at 65 you will have around $200,000, that means you’ll have an amount that buys as much as $200,000 buys today.
And if that amounts to spending $230 a week in retirement, you’ll be able to buy what $230 buys today.
Because of inflation, your actual retirement balance and spending amount will be much bigger than that, especially if you’re young. But the inflation adjustment makes the numbers more meaningful now.
The providers assume inflation will be about 2 per cent a year.
Spend Until 90
The retirement weekly spending numbers assume you retire at 65 and spend your savings until you turn 90, by which time you will have used up all the money. Presumably officials figured that people over 90 can get by quite well on just NZ Super, and indeed lots of older people say that.
Your weekly spend also assumes you leave your money in a KiwiSaver lower-risk fund through retirement.
You’ll find that the spending money is more than your lump sum divided by the 25 years from 65 to 90. That’s because, as you go through retirement, your money is sitting there earning compounding returns before you spend it.
For example, if your savings total $100,000, dividing that by 25 gets you $4,000 a year. But in fact you’ll be able to spend more than that.
The spending numbers exclude money you’ll get from NZ Super and any other savings.
The savings total assumes you continue to contribute as you’ve been doing in the last year.
There’s no allowance for savings suspensions (formerly contributions holidays) or withdrawals to buy a first home or for hardship. And the retirement spending assumes you don’t make any lump sum withdrawals during retirement.
The savings total assumes your pay increases by 3.5 per cent a year, and that your contributions rise by the same amount.
This is probably reasonable for employees. Even if you haven’t had big pay rises lately, over time most people’s pay rises are higher than inflation. And every now and then you get a bigger jump, when you’re promoted, or move to a new job.
This assumption won’t work well, though, for many self-employed or other non-employees who contribute $87 a month or $1,043 a year — just enough to get the maximum government contribution.
Of course you can always raise your KiwiSaver contributions each year. But if you stick with $1,043 your savings won’t grow as much as the projections. The younger you are the bigger the difference.
If you’ve made any one-off contributions in the year ending March 31, the calculations will assume you do the same every year until you turn 65. But these will be capped at $1,500 a year, to exclude occasional large contributions such as an inheritance.
Returns While Saving
The calculations don’t take into account how well your particular provider’s fund has performed lately. That’s because past performance is no guide to the future.
Instead, they assume the following returns, after fees and 28 per cent tax: In all of the lowest-risk defensive funds, 1.5 per cent a year. Then it’s 2.5 per cent in conservative funds, 3.5 per cent in balanced funds, 4.5 per cent in growth funds, and 5.5 per cent in the highest-risk aggressive funds.
Some critics say those rates are a bit high, and presumably they will be reduced in future years if that’s found to be the case.
Returns While Spending
When calculating retirement spending money, providers assume returns on that money will be 2.5 per cent after fees and tax.
That may also be a bit high for cautious people who want all their money in a low-risk fund at that stage. On the other hand, some will want the money they plan to spend later in retirement to be in a fairly high-risk fund.
What if You’re Different?
What should you do if you don’t fit the assumptions? You might plan to retire before or after 65, or make a withdrawal to buy a home.
Or maybe you want to see how much difference increasing your contributions or moving to another type of fund would make.
There are a number of KiwiSaver savings calculators on provider websites and elsewhere. Some will let you make adjustments to suit your circumstances.
And from now on KiwiSaver providers have to use the same assumptions in their calculators. This is a great step forward from when some providers made their KiwiSaver schemes look better by using rosy assumptions.
I recommend the KiwiSaver Savings Calculator on sorted.org.nz. Its projections assume inflation at 2 per cent, but you can turn that off and get non-adjusted numbers. You can change your retirement age, fund type and contributions. To check the assumptions used in the calculations, click on “How this tool works” at the top.
While You’re at It
You might want to check that you’re getting the most from KiwiSaver. See Getting a KiwiSaver WOF on the home page of maryholm.com.
What to Do if Your Numbers Look Too Low
There are four steps you can take:
- Increase your contributions. These days employees can contribute 3, 4, 6, 8 or 10 per cent of your pay. And every member – employee or not – can always contribute more, either regularly or occasionally, directly to their provider.
- The easiest step – move to a provider that charges lower fees. That can make a big difference to your total, especially over many years. The KiwiSaver Fund Finder on sorted.org.nz ranks funds by fees.
- Move to a higher-risk fund, which will have higher average returns. Note though that riskier funds are also more volatile, so you have to be prepared to see your balance fall sometimes. This is not a good move if you plan to spend the money within the next ten years.
- Plan to work beyond 65. This helps you in two ways: you have more years of saving, and fewer years to fund in retirement. What’s more, your savings grow fast at that stage if you’re still working. Let’s say you’ve saved $500,000 at 65. Even if you earn only 3 per cent on that – after fees and tax – that’s $15,000 extra in a year, and a bit more the following year because of compounding.
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.