This article was published on 31 January 2004. Some information may be out of date.

QAs a 53-year-old married man with no mortgage and no pension fund in place, I was thinking of starting saving $250 a week in a managed active investment fund.

But what worries me, and probably a lot of other people, is: will pensions be means tested by the time I retire, making saving during the last 12 years of my working life effectively a waste of time, if any income I have is deducted from our NZ Super?

If you’re going to have a huge income on retirement, this is no problem. But clearly starting at my age that wouldn’t be the case.

Any advice would be much appreciated.

AStart saving now.

Of course I can’t guarantee what politicians in the future will or won’t do. But I feel confident those who have saved will always be better off than those who haven’t.

Why?:

  • No government would want to kick savers in the gut, and send a message to would-be savers that it’s not worthwhile to save. New Zealand needs more saving.
  • You’re a Baby Boomer, one of a huge block of voters. It’s particularly unlikely that any government would want to enrage you, me and all the rest of us BBs.

I’m not saying there won’t be any new attempts to target NZ Super, by reducing payments to either those on high incomes or those with lots of assets.

The last time it was done, via the Surcharge, ended just six years ago.

Back when the Surcharge was introduced, in 1984, the Budget statement said there was “an inescapable conclusion … that there were other priorities for welfare expenditure than assisting those superannuitants who already had enough income on which to live comfortably, particularly the pressing need for assistance for low income families.”

That makes sense. And as we Baby Boomers retire, putting pressure on governments trying to provide us all with NZ Super, there are bound to be new calls for targeting.

But if it happens, it’s sure to affect only the well off.

Under the Surcharge, the tax rate and the income thresholds over which the tax applied varied over time. But it never affected more than a third of all superannuitants, and sometimes only a fifth. And a fair percentage of those were affected in a relatively minor way.

Any new policy is unlikely to hit the majority of retired people, just because of their voting power — and that of their children and other sympathetic observers.

Convinced? I hope so.

At $250 a week for 12 years, if you can get a return of 2.5 per cent after fees, taxes and inflation, you will accumulate more than $180,000 by the time you are 65. (To try other returns, savings amounts and periods, use the Regular Savings Calculator on www.sorted.org.nz)

That could make a big difference to the quality of your retirement. Go for it!

QYour bias against property investing is a great tragedy. An average person with above average determination to succeed can retire early and wealthy if they work hard, take some risks, and accept market fluctuations.

When I was 20 years old I made my first property investment. While others were spending and wasting their money, I instead saved and invested in real estate.

During my twenties I purchased six properties with little money down and creative financing. I hired cheap labour to do fix-ups, or did it myself.

Tenants’ rent and a small extra monthly contribution from my income paid all mortgages off within 10 to 12 years. I was always careful to keep tight control over the cash flow.

I reinvested the sale proceeds from my first properties and continued to make small down payments on good properties. My objective was to add value to the real estate, then locate and keep quality renters to pay off the mortgages.

I desired to sell and retire before 50. Capital appreciation was the sweetener, realizing that it would probably be there if I did things correctly.

I learned what hard work and commitment to a sound financial game plan meant.

Doing my homework helped minimize my risks. Locating quality tenants, and in some cases quality property managers, helped protect my investments. I looked at maybe 100 or more properties before I purchased one.

Some tenants were good, and some were not. Some investments were sweet, others soured. Real estate cycles went up and down.

Through it all I kept focused on my main goal, for tenants to pay off my mortgages to create my retirement nest egg. I simply managed the cash flow and the issues.

I am now 50 years old, having retired almost 5 years ago. I now travel and live a less complicated life, in fine comfort.

I would never think of gambling my money in the stock market, particularly when overpriced, frequently subject to fluctuations irrelevant to company assets, and not in my control.

Selling stock for a profit is generally not only dependent on market timing for capital appreciation, but there is no tenant to pay off the purchase price of the stock.

And as a sweetener, good capital appreciation of real estate will generally appear with good properties, in good locations, after a 10 to 15 year holding period, if you do your homework correctly.

The key is that you do not need to make all investment decisions correctly. Accept that some tenants and some properties will just not work out. You do, however, need to make more good decisions than bad decisions, keeping the bad decisions to a minimum.

But remember that if you make no decisions, you will go nowhere and only dream of how things could have been.

There is no substitute for doing your homework and being determined to succeed over a long term. Anyone willing to plan for the long term in real estate can retire comfortably and wealthy.

AFirstly, congratulations on doing so well. It sounds as if you deserve your successs. And I agree with much that you say.

But let’s start with some points of disagreement, firstly your objections to investing in shares.

You say selling shares for profit depends on market timing. That’s not true if you hold the shares for the long term, which is what you advocate for property. Most shares will appreciate over most 10- to 15-year periods — and generally to a greater degree than property.

There may be no tenants to pay off the purchase price, but what about dividends? Dividend yields on many New Zealand shares are higher than rental yields on many properties, especially after expenses.

You also say that shares might be overpriced and that they are frequently subject to fluctuations irrelevant to the underlying assets. But those concerns also apply to property.

The fact that property prices have fallen in the past suggests overpricing at times.

And the price a property would fetch on the market no doubt varies widely, from month to month and year to year.

People don’t sell the same property over and over, the way shares are sold, so we don’t see the volatility. But the whole property market moves up and down, as you say. And logic says that most individual properties move more.

One of your objections to shares, though — that they are not in your control — is indisputable.

In fact, I think it’s the crux of the share/property debate. Some people like having control over their investments, and are happy to take on all the responsibilities that involves. Others would rather put their money in a share fund and go to the beach.

Your letter is full of comments about time you’ve spent on maintenance, selecting tenants, looking at 100 properties before buying one, and homework in general. Even hiring others for maintenance and property management takes time, as well as expense.

It sounds as if you not only didn’t mind this, but enjoyed it. Great! But many would hate it.

You also got around another of my worries about property investment — and one that’s largely behind what you call my bias against property.

Most people buy just one rental property, perhaps two. This gives terrible diversification, especially if they also own their own home and it’s nearby.

You acknowledge that some properties “will just not work out.” If that applies to the only rental somebody owns, they are in trouble.

But you have always owned many properties, spreading your risk.

I do think, though, that you are a rare bird, as my mother used to say.

For others to do as well as you have, they would need to start young, and be willing to give up the fun that can go with a misspent youth.

They would also need: the courage to borrow lots and face the risks that come with borrowing; the perseverance to hang in through down markets; a good and steady income to supplement their investments when necessary; and the willingness to put much time and energy into their investments.

And luck with timing. When you made your first purchases — the ones that gave you enough capital to weather the storms later — inflation was roaring away. Rents rose fast, as did your income. And borrowing to the hilt made lots of sense then. It’s much riskier now.

Note to readers who might be inspired by your letter: You have been warned!

I should also add that a person with all the qualities you have would probably also do well in the share market, and perhaps better still with a diversified portfolio of properties, shares and other investments.

QA contributor recently criticised a particular piece of advice you offered, somewhat forcefully claiming that one should “never sell a rental property, never sell”.

That contributor is making the same mistake I have committed often in the past — offering one’s own success as a mandatory course for others to follow.

I now recognise that there is no such thing as a “one size fits all” recipe with investing. Each investor is a unique individual with their own range of critical variables such as: age, funds available, liabilities, ambitions, plus their tolerance of risk and bad times.

Because of these variables one will never get real consensus on the relative merits of shares versus property. Whilst I believe that the long term does favour shares (now inflation is under control), in the short and medium term the needle can, and does, swing rather wildly.

To maximise such opportunities investors need to be flexible in their investment policies.

Furthermore, each investor’s circumstances and attitudes do change from time to time. What might personally suit today may no longer be preferable, or acceptable, at a later date.

Accordingly, “never sell a rental property” is bad investment advice. Investors accepting such dogma would be denying themselves the chance to pursue better opportunities when they arise.

In our own situation, my wife and I have enjoyed rather substantial financial success, firstly in business, then in both shares and property.

I have only one investment that I regard as “never sell” — my wife! All other investments I would sell without hesitation, providing the price was right and the money could be better used elsewhere.

AStand back for the feminist backlash!

But I’m going to give you the benefit of the doubt. I’m sure you don’t regard your wife as a chattel, but rather your marriage as a relationship in which you have invested much time, energy and love.

Your letter is rather apt after the previous one.

I’ve got just one quibble. It sounds as if you like to move in and out of investments according to what’s happening in the markets.

That sometimes works, but often people make their moves too late.

It’s usually better to choose an allocation of shares, property, bonds and so on to suit your needs and stick with it, regardless of what markets are doing. Change only when your circumstances change.

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.