NZ Herald 7 October 2023

ANot too much maths, sorry. If we pull numbers out of the air, they won’t apply to most people. And many readers’ eyes glaze over!

Anyway, I doubt if there is data on this. But if there was, I think we would find that, while many people do indeed “trade up” properties through their lives, they don’t tend to take on bigger and bigger mortgages.

Over the years, mortgages are paid down, enabling people to make larger deposits on new homes. And those who can manage it typically put extra money into reducing their mortgage faster, with an eye on getting to retirement mortgage-free — whilst also saving for retirement. This is often helped by rising incomes in middle age, and decreasing expenses as children leave home.

Those who can’t manage to pay their mortgage fast probably tend to just stay in the same property for decades — often perfectly content with their home.

Also, many people, once the kids have gone, move to smaller and sometimes lower-priced homes. And then, in retirement, they might move to a cheaper suburb because it’s further from the centre of a city, as they are no longer commuting, or move to a cheaper town. Such moves can free up several hundred thousand dollars for retirement.

Another thing: it’s not uncommon for mortgage repayments to be boosted by an inheritance or two.

So, all in all, I doubt if you’ll find many people taking on big mortgages in their middle age.

On your final point, I don’t think mortgage repayments should take total priority. I recommend everyone joins KiwiSaver and puts in at least $1,042 a year, to get the maximum government contribution. And, if you are an employee, put in at least 3 per cent of your pay to get the maximum employer contribution.

These incentives boost your return considerably. What’s more, you get diversification away from just a property, and you learn over the years about how markets go up and down, and the value of sticking with the right investment through thick and thin.

Beyond that, though, it usually improves your wealth more to pay down, say, a 6 per cent mortgage than to make an investment that probably won’t keep earning a return, after tax and fees, of 6 per cent or more. And paying down a mortgage is risk-free.

When mortgage rates were unusually low, a couple of years ago, this argument was weaker, and I suggested people might prefer to put extra money into savings rather than their home loan. But usually concentrating on mortgage reduction makes most sense.

AThis is a variation on the theme. Rather than asking whether you should pay extra off your mortgage or invest that money, you’re considering spending it.

First of all, I don’t think your justification — that inflation will erode the value of your money so you might as well spend it now — quite works.

If you were to put the cash under a mattress you would be correct. And bank savings accounts pay less than current inflation — although term deposit interest is sometimes more than the CPI.

But, as explained above, if you pay down a mortgage, that’s equivalent to earning whatever the mortgage interest rate is. And these days mortgage rates are often considerably higher than inflation. So you’re still getting ahead.

Note, too, that the Reserve Bank seems to be determined to reduce inflation, so it probably will be lower soon.

None of this is to say that you shouldn’t spend some of your money on fun. Absolutely you should! Just keep it all in balance. And it’s great to hear you are enjoying your new home.

P.S. Current inflation isn’t really “massive”. In the 1970s and 80s inflation was in the high teens.

ASorry, but they don’t.

“A business can refuse to accept cash as payment for goods or services, though they must make sure you know in advance so you can be prepared for it,” says the Citizens Advice Bureau. “For example, during a pandemic a business might discourage cash payments from customers, to reduce the risk of infection.

“As long as they tell you in advance, a business can also charge you a fee for paying with cash.”

The CAB adds, though, that if you want to use cash to pay off a debt, the recipient is obliged to accept it.

The Reserve Bank goes into more detail. “Retailers offering essential services (such as supermarkets, pharmacies and petrol stations) should be supporting shoppers who can only pay with cash, but there is no legal requirement for them to do so.

“Shoppers who can only pay with cash are more likely to be vulnerable, young, elderly, poor, disabled or seasonal workers.

“Some businesses are balancing the different concerns by asking people to pay with contactless or card payments if possible, and then providing limited checkouts accepting cash for those who have no other way to pay.”

AThere’s never been anything to stop you from buying shares every day. But I assume you mean setting up a plan to invest a regular amount into, say, a share fund.

Whenever you drip feed your purchases of any investment whose value fluctuates, you benefit from what’s called dollar cost averaging.

In a ridiculously simplified example, let’s say units in a share fund sometimes cost $4 and sometimes $2. And you invest $20 each week.

• When the price is $4, your $20 gets you 5 units.
• When the price is $2, you get 10 units.

Over the two periods, you’ve spent $40 and bought 15 units. Your average price is $40 divided by 15, which is $2.67. But the average price in the market is $3 — halfway between $4 and $2.

You’ve bought some bargains. How come?

Your $20 buys more investments when the prices are lower, and fewer when prices are up. This happens automatically — and works well when you make regular contributions to any investment with fluctuating values, such as a higher-risk KiwiSaver fund.

Okay, now to your question: Would it work better with daily purchases rather than weekly purchases? The answer has got to be yes. Prices can certainly vary considerably from day to day.

I rather doubt that daily versus weekly buying would make a huge difference, but it couldn’t hurt.

AThe legislation actually says you can access your KiwiSaver money not at 65, but at the age of eligibility for NZ Super — which is currently 65. So if the Super age goes up, so does the KiwiSaver access age. But read on.

AI suppose the NZ Super age and KiwiSaver withdrawal age were linked because the KiwiSaver designers figured that most people don’t retire until their Super starts flowing in, and they didn’t want people withdrawing their KiwiSaver money before retirement. The basic idea is that it is retirement savings.

But you raise some good points about how raising the KiwiSaver access age would be bad news for many people.

Life expectancy at 65 is about 19 years for men and 21 years for women. And if you have major health problems, you would probably expect a shorter retirement than that. Subtracting two years is significant.

Also, one of the worries about raising the Super age is that people who work in jobs requiring physical strength, or people with health issues, may need to retire at 65. If the Super age were raised, but these people were given access to their KiwiSaver money at 65, that could help to tide them over until their Super starts.

For everyone else, it’s hard to imagine they would squander their KiwiSaver money at 65 after saving for many years. They might, for example, use the money to pay off their mortgage, or do home maintenance — obviously good uses.

All in all, keeping the KiwiSaver access age at 65 would be one way of softening the negative effects of raising the Super age. Good thinking!

P.S. I hope you’re right that lots of people also have savings outside KiwiSaver. It’s always good to contribute enough to KiwiSaver to get the maximum government and employer contributions, as mentioned above. But beyond that, it’s a good idea to do further saving outside KiwiSaver, enabling you to withdraw the money when you want to.

Mind you, for some people, the temptation to spend savings is too great. In that case, it can work well to lock all your retirement savings into KiwiSaver.