- Easy rule of thumb on how much you’ll need in retirement
- KiwiSaver solution for Downs syndrome son
- Reader unsuccessful at opting out of KiwiSaver
- Different types of fees-only financial advisers
QWhat do you think of this easy rule of thumb for those who retire at 65: To receive x dollars per week in retirement you need to have saved x (the same number) thousand dollars. For example, to spend $100 a week in retirement you must save $100,000. Near enough?
ALeonardo da Vinci once said, “Simplicity is the ultimate sophistication” — although he probably said it in Italian! Anyway, you must be pretty sophisticated, as you’ve come up with a superbly simple formula that is, indeed, near enough for people to work out a rough retirement savings goal.
As you say, under your rule, with savings of $100,000, you can spend $100 a week in retirement — as well as NZ Super. And your savings will probably last as long as you do.
How can I say that? In the June 3 column, I wrote about another retirement spending rule of thumb, from the Society of Actuaries: each year you spend 6 per cent of your starting sum.
As I said then, “If you start at 65 and invest in a conservative fund — in or out of KiwiSaver — your money will almost certainly last until your mid 80s. And, depending on future returns, it may last until you’re 90 or older, says the Society.
“If you outlive your savings, you could perhaps sell some assets or take out a reverse mortgage, although many people say that NZ Super is enough at that stage of life.”
Applying the Society’s rule, with $100,000 you would spend $6000 a year — or $115 a week. With your rule, spending $100 a week, your savings will last somewhat longer.
Note, too, that if you retire later, you will be able to spend more per week.
The Society of Actuaries also came up with three other rules of thumb about how far a retirement savings sum will go. See tinyurl.com/RulesOfThumbNZ.
But none of them is quite as simple as yours.
QWe have a son with an intellectual disability, and when KiwiSaver started we opened an account for him as well as his brothers. We contributed the $1050 per year either from our funds or from his Supported Living payment.
Last year we bought him a house, but the Family Court did not allow us to use his money to purchase his house as under the PPPR (Protection of Personal and Property Rights) Act our son is not a legal entity, can’t own a house and we could not settle his money into his trust. Therefore we did not use KiwiSaver for the purchase.
Now all of his benefit is being used to pay for his expenses living in the house. To continue his KiwiSaver we are continuing to make the contributions.
People with Down syndrome do not live as long, so he may not live until 65. Should we continue with KiwiSaver or use serious illness to withdraw the money and invest it elsewhere where we could more easily access the money to use it for his benefit during his lifetime?
AIt seems unfair that your son’s KiwiSaver money couldn’t be used to buy a home, but there’s no point in dwelling on that. Let’s look at what’s the best path from here.
Given your son’s life expectancy — and your desire to spend the money on him — your options seem to be:
- Stop contributing to KiwiSaver and put the money into other savings for him. And also — if possible — withdraw what’s in KiwiSaver to add to those savings.
- Keep contributing to KiwiSaver, knowing that you will be able to withdraw the money at a later stage, when your son might need it more. Your son will get tax credits in the meantime.
The choice depends on when you think your son could best use the money and, of course, on whether you can withdraw it.
If someone wants to withdraw KiwiSaver money because of serious illness, it’s the KiwiSaver scheme’s supervisor, not the provider, that okays it. I asked the Public Trust, which is supervisor to several well known KiwiSaver schemes, how it would be likely to handle your son’s situation.
A spokesman replies, “If a registered doctor certifies as required the ‘Serious Illness’ (as defined means an injury, illness or disability) threshold, we will normally approve the withdrawal.” Sounds hopeful.
Going into more detail, he says, “We believe the application would work best under Serious Illness rather than Serious Financial Hardship. We can’t definitely say it would be approved but would give it empathetic consideration.”
For a serious illness application, “The member — or the property manager (PPPR) on behalf of the member — would need to complete a Serious Illness application form detailing the circumstances of their illness. This can be either of two main criteria:
- “Result in the member being totally and permanently unable to engage in work for which he or she is suited by reason of experience, education, or training, or any combination of those things; or
- “Poses a serious and imminent risk of death.
“This confirmation needs to be signed off by a registered doctor on the “Registered Medical Attendant” (RMA) document, and they must also provide additional medical evidence where required.”
I suggest you ask your son’s provider how to go ahead with this process, and also ask if you could postpone the withdrawal if the second option suits you better.
If the answer is “No”, here’s another idea. Let’s say your son’s balance is $15,000. You could spend $15,000 of your own savings on him, and then expect to inherit his KiwiSaver money later on. You could also keep contributing to his KiwiSaver in the meantime, to get the tax credits.
I wish you all the best with this, and hope it’s easy.
QI saw your article about KiwiSaver. I started work, and I signed an opt out form, but my employer still deducted money to KiwiSaver and also added the after-tax employer contribution. I rang IRD. They said, “Your job gives us money to give to AMP. That’s all we do.”
But I signed an opt out form. Mary is this common practice?
AIt’s a pity you would rather be out of KiwiSaver. You miss out on money from the government and your employer. But still, you should be free to leave.
I asked Inland Revenue firstly whether your situation is common, as I’ve never heard of it happening.
Said a spokesman, “We process a number of applications for late opt outs, but the specific reason for a late opt out is not recorded in our system, so there’s no data to indicate how common this particular situation is.”
What should you do about it? “In the first instance, the member should take it up with their employer — sometimes employers forget to send in the opt out form.
“If their employer continues to be non-cooperative, then the member should apply to Inland Revenue for a late opt out using the KS10 form (this is available on the KiwiSaver website).” That’s www.kiwisaver.govt.nz.
“They will be required to provide a reason for the late opt out, and there is no guarantee the application will be approved. This will depend on factors such as the time elapsed, the contributions received and any other information available,” said the spokesman.
On timing, “They can apply for a late opt out if it’s more than 56 days since they started with the employer and it’s less than three months since the first contribution was received by Inland Revenue.”
If you succeed with your late opt out, it may take a while to get all your money back. Some of it may still be with the employer, some with Inland Revenue and some with the provider. “Contributions held by Inland Revenue on behalf of members will accrue interest,” says the spokesman. “The member will not be entitled to a tax credit and the employer contributions will be returned to the employer.”
If you miss out on a late opt out, because of timing, your request will be treated as an application for a contributions holiday, said the spokesman.
Okay, I replied, but normally an employee can’t take a contributions holiday until they have been in KiwiSaver for at least a year. Would someone in your situation have to wait until a year since they joined?
“They can apply for an early contributions holiday, but this will only be considered if the member is experiencing, or likely to experience, financial hardship. The member will need to provide evidence of financial hardship to support the application for an early contributions holiday.”
Otherwise, you’re in for a year. But note that you will then benefit from one year of employer contributions and the tax credit. While this shouldn’t have happened to you, it’s not all bad.
QWhen it comes to advisers, another characteristic that I think will become increasingly relevant is whether the adviser charges asset-based fees or not (ie, a percentage of the funds under advice).
This is very common but I suspect will become a historical artefact at some point in the future. Asset-based fees are better than commission, but they still create conflicts of interest. For example, if a client receives a windfall, it makes it harder for the adviser to recommend paying off the mortgage (where they won’t receive any ongoing remuneration) rather than investing in financial assets (where they will be remunerated).
I’m also not convinced that advising someone with a portfolio of $800,000 is four times as hard, time-consuming, or risky, compared to advising someone with a portfolio of $200,000, and that the client should therefore be charged four times the amount.
Asset-based fees also create a situation where even if advisers don’t advertise a minimum initial investment, they are going to be far less interested in a young couple with $50,000 or a retiree with $150,000 than someone who has a lot more money (and might arguably get less marginal benefit from receiving good quality advice). Food for thought.
AAs I’ve said recently, I clearly prefer advisers who charge fees over those who accept commissions from the financial providers with whom they invest clients’ money. On the Info on Advisers page on www.maryholm.com, I list fees-only advisers.
You’re making a further distinction, between different types of fees-only advisers. Here’s the different ways they charge for their services:
- Asset-based fees — the adviser charges a percentage of a client’s money.
- Fixed fees for running a client’s investments.
- Hourly fees.
I agree that asset-based fees have their flaws. As well as the points you make, they are less visible than if the adviser sends a bill. They are usually deducted automatically from returns.
On your comparison of the $800,000 and $200,000 clients, the egalitarian in me quite likes the idea that the richer client subsidises the poorer one. And in any case many advisers would use tiers, so the percentage is lower for clients with more money. But still, there’s probably some unfairness in the system.
Clients of all financial advisers should get a clear explanation of all the ways the adviser is being paid, how clients are charged, and how many dollars that amounts to.
Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. 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.