NZ Herald 6 March 2021

AI wonder if the difference in your ages affects your attitudes to saving? Anyway, I’m all for you two following your dream.

It might mean that you end up worse off, but you also might be better off. It’s not just a question of comparing growth in your savings with growth in lifestyle property values. There’s also growth in the value of rural properties versus city houses, given you want to move back to town later.

We’re talking perhaps 20 years, so we would expect them all to grow considerably over that period. But nobody can predict which will grow fastest.

Whatever happens, though, it seems highly unlikely you will end up financially struggling. And the mortgage is not a worry in itself — especially given that you have savings. If the lifestyle block is currently worth $150,000 more than your house, it will probably also be worth more than the house you move back to later on.

By then, hopefully, you will have repaid the mortgage. So the money you free up by “trading down” will make up for the lack of new contributions to your managed fund in the meantime.

In short, go for what you want. And if that turns out not to be the best choice financially when you come to sell the lifestyle block, just look out over your beautiful rolling meadows and smile.

Money should be a means to an end, not an end in itself.

P.S. I love the term “active relaxers”.

AI actually recommend investing not just in Aussie and American shares, but worldwide shares. The easy way is through a low-fee international share fund, run by a New Zealand provider.

The reason is clear. You reduce your risk by investing in many different industries and many different countries. They won’t all plunge at once.

But what about supporting local businesses? It’s a fair point, but there are a couple of counter arguments:

• By buying shares in the market, you are only indirectly supporting business. Your money doesn’t go to the company, but to whoever is selling the shares.

  It’s different, of course, if you buy shares in an initial public offering, or IPO — which involves new shares coming onto the market — and the company uses your money to expand their business. But most share purchases aren’t like that.

  Having said that, the more people who are buying New Zealand shares, the more likely it is that there will be IPOs.

• I argue that it’s better for the New Zealand economy, as a whole, if we all hold considerable offshore investments.

  Think about what would happen if this country were hit by a major economic crisis, such as a terrible agricultural disease or disruption from a big earthquake or eruption. Or what if a Covid-like virus broke out and took hold only in New Zealand? As we have learnt in recent years, anything can happen.

  Such a disaster could see profits plunge, unemployment soar and the value of many New Zealand shares plummet.

  The more New Zealanders who could cash in overseas investments — which would have retained their value — the better off everyone will be.

Footnote 1: One argument in favour of local shares is dividend imputation, which means you get credit for the tax already paid on company profits, and so you are not taxed again when those profits are paid out as dividends. This doesn’t happen on international shares. It’s one reason why it’s good to have, say, 20 to 30 per cent of your shares based in New Zealand.

Footnote 2: It sounds as if your son has done really well over a very short time. I hope he doesn’t let it go to his head and put in more money than he can afford to play with.

The same goes for you, actually. The recent surge in interest in share investing is great. But I worry that people will start thinking shares nearly always rise. And, worse, that they decide they have a gift for picking which shares will do best.

Nobody can do that consistently, and especially not amateurs. By all means invest in shares — local or otherwise — but:

• Buy a wide range of shares or use a share fund.
• Use only money that you don’t mind losing, or that you can lock in for ten years or more. Long term, shares rise. Short term it’s anybody’s guess.
• If you must trade often, be aware that the most successful share investors are those who buy and hold, preferably for decades.

AIt seems to be a growing trend for people with mortgage-free homes to think that they should somehow make use of the “tied-up” money.

The idea is usually to take out a mortgage and invest in a rental property, or perhaps shares or a share fund. And these days, there’s a pretty good chance you will earn a higher long-term return on your investment — after fees, tax and other costs — than the mortgage interest rate, so you’ll come out ahead.

But do you want to? You have to select the best investment for you. And there will — not “might” but “will” — be times when share and property prices drop, and that could be nerve-wracking. With rental property there can also be lots of hassles.

The fact is that the tied-up money is already bringing you a good return, in that it provides you with free accommodation — apart from costs like maintenance, rates and insurance. Compare your housing costs with someone paying down a mortgage or paying rent. You are much better off.

And leaving your money “in your house” is much easier and less worrying. It’s what I’ve chosen to do.

However, as you get older you might want to consider a reverse mortgage to finance your spending if you’re short of cash.

That would let you run up a debt, on which you make no repayments of principal or interest until you move out or die. At that point the loan is paid off in a lump sum.

While reverse mortgage interest rates are considerably higher than on ordinary mortgages, a reverse mortgage lets you enjoy some of your tied-up money.

It’s important to note, though, that these loans can grow fast, with compounding interest. I don’t recommend a reverse mortgage until you are at least 75, and preferably 80, unless you have a short life expectancy.

You can read more on what to take into account by clicking on “reverse mortgages” under Topics on www.maryholm.com.

For another idea on how to use tied-up money, read on.

AGood on your friend. What she did is a great idea, which others might want to copy — as long as:

• They can count on the people they help paying them back.
• House prices rise. If prices stabilise or fall for a while, it might be a long time before the money comes back. Given the way the government has been talking lately, I would hate to see anyone counting on big house price rises continuing.

On your desire to do something like this, it sounds as if you are not in a strong enough position financially.

It’s not uncommon for older people to want to — or feel pressure to — financially help their children, grandchildren or others. Sometimes it’s contributing to a house deposit, or guaranteeing a mortgage. The rationale goes: “The young ones need the money now, not when I die.”

In many cases, that’s good thinking. But only if the older person can spare the money and still have a comfortable retirement. I’ve seen elderly parents sacrifice for their family, only to watch the younger ones later enjoying a higher standard of living than their parents.

Mortgage guarantees are particularly tricky. Before anyone guarantees a loan, please consider how you would manage if the borrower defaults and you have to come up with the money. Unforeseen stuff happens. People lose jobs, businesses fail, or marriages fall apart. I’ve heard of retired people losing their homes in these circumstances. It must be devastating for family relationships too.

So lend or give what you comfortably can. The kids and grandkids can get the rest in your will — or perhaps when you are 85 or 90 and have a clearer picture of how much you will need for the rest of your life.