NZ Herald 8 October 2016

AHmmmm. I’m not sure if this is a sad cautionary tale or one to be celebrated.

At the risk of incurring the wrath of those who say careful money handling is the be all and end all, I’m inclined to say, “Good on you!” to your nephew.

Saving money is, of course, good. But there’s a time and place for everything, and at the end of your OE saving might not be top priority. The fact that your nephew had saved the money in the first place suggests he’s not a total squanderer.

The story goes that economist John Maynard Keynes was asked on his deathbed if he had any regrets. He replied, “I wish I had drunk more champagne.” On your nephew’s deathbed he may look back at those last trips and farewells with a big grin. I bet he’ll remember them more clearly than his subsequent struggle to save a house deposit.

AFirstly, let’s set aside the ethical issue of whether you should repay the student loan. Some would say you should, because the lack of interest is subsidised by other taxpayers. But there are counter arguments. Given you haven’t repaid your loan so far, I’ll assume you don’t feel obliged to do so.

So does it make sense financially to repay the loan now? The answer is no.

Assuming you don’t repay it, once you’ve bought the house you’ll have two debts: the mortgage at an interest rate of, say, 5 per cent, and your student loan with zero interest.

A basic money rule is to always repay a higher-interest loan first. This also applies to credit card or other high-interest debt. Interest eats into your wealth, and the higher the rate the more it gobbles. So getting rid of interest payments — the highest first — preserves your wealth.

So you should put the money you had planned to use to pay off your student loan into mortgage repayments instead. How?

One way is to simply make a bigger deposit on your house. You’ll then pay less interest over the life of the mortgage and pay it off faster.

However, if you’re worried about cash flow — because of compulsory student loan repayments taken out of your pay — it might be better to just stick with your original house deposit, and make part or all of your mortgage a revolving credit mortgage.

With that type of mortgage, you reduce the amount you owe by depositing any money you have sitting around into the mortgage account. You then pay interest on the reduced daily balance.

For example, if you get your income deposited into your revolving credit mortgage account, it reduces the mortgage interest until you withdraw the money for day-to-day spending. The idea would be to also deposit the money you had planned to use to pay off the student loan.

Reducing a debt on which you’re paying 5 per cent is the same as earning 5 per cent after tax and fees on that money. That’s a good deal. And if you were struggling to get by some weeks, you could withdraw what you need, but leave the rest in there doing its interest reduction work.

Meanwhile, you should be paying down the mortgage regularly. With lower interest, more can go into principal repayments, speeding the day you repay the mortgage in full.

Another option is to do a bit of both — a bigger deposit and a revolving credit mortgage. Discuss what’s best with your mortgage lender.

AWhile it’s always risky to judge these situations without having all the facts, the advice you received sounds decidedly dodgy to me. I can’t help but wonder if your adviser was more motivated by what’s in it for them than what’s in it for you.

My objections to the adviser’s so-called advice:

• You don’t need to be in shares. You have enough money for a comfortable retirement without taking risks.
• You’re clearly not comfortable being in the share market. Why should you be worrying unnecessarily about statements and so on?
• While your average return over the years is likely to be higher than in a bank, the returns will vary, as you have already seen. That must make it hard for you to budget.

Given that your total income is NZ Super and returns on these savings, I reckon the adviser should have been urging you to spend not just the returns but also some of your principal each month.

How much? A simple and conservative calculation would be to divide your savings by 15 and spend one 15th this year, one 14th of the remainder the next year, one 13th the year after and so on.

Returns on the balance should allow your spending to grow each year with inflation.

That would get you through until 98 and your wife to 85 — and probably further, given that most people spend less as they progress further into retirement. At that point you would probably manage on NZ Super.

What should you invest in? I suggest you put at least the money you plan to spend in the next two or three years in bank term deposits. And by all means put the lot there, if that makes you feel more comfortable.

If you wanted a higher average return, you could — with an adviser’s help — put the money you plan to spend in three to ten years in bonds or a balanced fund, and perhaps the money you plan to spend in more than ten years in shares. But if I were you, I would seek out a different adviser.

AAh, but did you offset that by getting more than your fair share of education or healthcare? What a can of worms we’re opening here.

I like your insurance analogy. If someone has house insurance and dies without ever having claimed on it, we don’t expect the insurance company to pay compensation to the person’s family.

And there’s even less of a case for NZ Super, because the person didn’t pay towards it before retirement. As I said last week, the money comes from current taxpayers.

ATo clarify this for other readers, this option is available to people who get a state pension from Australia, Ireland, Jersey and Guernsey, the Netherlands or the UK. For more info see tinyurl.com/SpecialBank.

So why wasn’t the option offered to you? It probably was.

“Here’s an example of the form letter we send to those applying for Australian superannuation,” says a spokesman for the Ministry of Social Development. “This is sent to those who have indicated as part of their application that they have spent time in Australia. I’ve highlighted the reference to the special banking option.”

Under the heading “Payment options”, the letter tells you how to apply for the Special Banking Option.

Mind you, by the time you get to that point in the letter you’ve already been told that if you want to get NZ Super you have to apply for an Aussie pension. “You will need to complete the application forms for Australia that are attached to this letter and return them to us in the envelope provided by (date),” says the letter.

They are formidable forms. So you might have been a bit distracted.