Mary Holm: Saving excuses out the window

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Kids and KiwiSaver

I have a problem with my kids and KiwiSaver. My two oldest are over 18 and don't want to join as they can't afford the contributions, and 65 is too far away for them.

The others are under 18, and I think that if I enrol them they may have the same attitude as the older two, and be upset that I have committed them to something they don't want.

Clearly they can take contributions holidays, but I'm guessing that would be a hassle, knowing what government departments are like.

As they reach 18 they have the legal ability to make their own decisions. Are they legally bound to a decision I have made on their behalf when they were dependants?

Let's start with the oldest two. Their "I can't afford it" excuse is about to go out the window - and the same applies to all employees.

In less than two weeks, on October 1, tax cuts will take effect. Every wage and salary earner will take home at least 2 per cent extra. And guess what? Two per cent of pay is the minimum employee contribution to KiwiSaver.

That means that if you sign up for KiwiSaver at the end of this month, your take-home pay won't go down. What's more, the tax cut is higher than 2 per cent for everyone earning over $14,000 a year, so most people's take-home pay will rise - despite new KiwiSaver contributions.

We should, of course, also take into account the rise in GST on the same date from 12.5 to 15 per cent. The Government has said the tax cuts will more than cover GST increases for all employees, but what if we add KiwiSaver to the mix?

People on above-average incomes will find their tax cuts more than make up for both new KiwiSaver contributions and extra GST.

For those on lower incomes, there will be a gap. Still, if you really want to be in KiwiSaver, I reckon you'll cope with somewhat higher prices - encouraged by the fact that your pay cheque hasn't changed or has grown even after joining KiwiSaver.

To see how the tax cuts and GST numbers will work for you, use the calculator at www.taxguide.co.nz

Back to our correspondent and his kids - for whom retirement is something vague and distant. Fair enough. But they may well want to buy their first home in the next few years, and KiwiSaver is by far the best way to save for that. See www.hnzc.co.nz for details.

What about the younger ones? I haven't been able to get a definitive answer about whether an adult can pull out of KiwiSaver if their parent signed them up when they were a child. But that doesn't matter much.

They can easily take a contributions holiday after a year in the scheme. If they Google "contributions holiday request" they'll get the form. It looks straightforward to me. Have any other readers had a hassle with it?

The maximum contributions holiday is five years, but it can be renewed all the way through to retirement. However, I doubt if your kids will end up doing that. KiwiSaver is a good deal.

By the way, if you want to support your children in KiwiSaver, help the over-18s to contribute at least $1043 a year, so they get the maximum tax credit. But don't bother to do that for the younger ones until they turn 18, as under-18s don't receive the tax credit.

Managed share funds

I was a moved to write by your response in a recent column to the small self-described "pensioner/investor" who had netted a minus 7 per cent return over the last year.

Your comments that "broadly speaking, any share is probably as likely to do as well as any other" and "a random group of 20 shares will probably perform as well as your carefully chosen ones" seem to suggest that all managed share funds are a crock, as a monkey would perform as well as a manager.

Is this what you intended to imply?

You go on to say that, "if you don't need to spend the money for more than a decade, I suggest you leave the investments where they are". I note the writer was a pensioner - and wonder if they have a 10-year horizon?

More to the point, cash has performed as well as equities over the last 10 years - and without the ups and downs - so why not cash up?

Another thing: I understand the argument of history that is advanced to justify overweighting in shares when looking at longer term investment. But I also hear those making that argument say in the next breath that past performance is no guarantee of future performance. I've always found it a bit difficult to "square" that particular circle.

Far from being a crock, managed share funds are a good way for ordinary New Zealanders to invest in shares, mainly because they give broad diversification, and they are easy to drip-feed into.

Also, the managers handle dividends and other transactions, making it simpler than direct investing in shares.

On the downside, managed share funds charge fees, sometimes rather high ones. It really pays to look for a fund with low fees.

Which share funds are likely to charge low fees? Index or passive funds - which buy and hold a broad range of shares, often all the shares in a market index. They rarely trade, which keeps costs down.

Unlike active funds, the managers of passive funds don't put time and money into trying to work out which shares to buy or sell. And that's where my comment, "broadly speaking, any share is probably as likely to do as well as any other", comes in. Passive managers would agree with that.

Responses to your other points:

•On the 10-year horizon for a pensioner, the man had recently retired. Life expectancy of a man at 65 is more than 18 years, and for a woman at 65 it's more than 20 years.

I advise retired people to invest any money they plan to spend in more than 10 or 12 years in shares or a share fund - if they can cope with volatility. This gives the best chance their savings will grow, after allowing for inflation. I explained this in some depth last week.

•You're not the only one confused about experts saying both: "history shows us that it's best to invest in shares for the long term" and "past performance is no guide to the future".

The comments apply to different periods. What happened over several decades gives us good information. But what happened over the last few years - or even worse the last few months - can be terribly misleading.

I also think history is more helpful when we're comparing different types of assets, such as bonds, shares or property, than when we're assessing particular shares, managed funds and so on. The abilities and luck of companies and fund managers change. It's probably dangerous to take too much notice of the history of a share or a fund manager, even over the long term.

Frequent trading

"Time in the market; not timing the market." A superannuitant with no apparent investment experience goes share trading - and then writes to your column about it? I bet your eyes rolled that much you were scared the insides of your toenails were going to scratch the retinas.

Oooh, that sounds dangerous. But I must say I did wonder what the man had been reading, and hoped it wasn't this column!

I have warned so many times against trading shares frequently. Even experienced people don't tend to do any better than those who buy and hold - usually worse after trading costs.

Just as alarming was the fact that he was assessing how well - or actually how badly - he had done over a mere year. See my comments above.

Spending partner

I read the recent question about an overspending partner with great interest, as I'm a financial recovery counsellor. As you so rightly say, it's a tough question. Financial differences rank among the greatest sources of marital misery.

You said that ideas were welcome, so here's my tuppence worth:

A book, by Olivia Mellan with Sherry Christie, called Overcoming Overspending: a winning plan for overspenders and their partners, published by Walker and Co in 1995. An oldie but a goody, this book not only goes into the reasons behind overspending, but also looks at tools and techniques for overcoming it and how partners can help. It doesn't seem to be in the Auckland libraries but used copies are available from www.fishpond.co.nz and a new edition is available from www.amazon.com.

In my practice, I use a tool called the MoneyAutobiography, which was developed by Karen McCall of the Financial Recovery Institute. It's a great tool and is particularly useful for couples as they can both complete it, and then share what it has brought up for them. It is great for unveiling what has influenced our money and spending attitudes and behaviours. These insights can help couples understand their differences. It is available at www.financialrecovery.com. Click on Products.

As a former overspender myself, the word "budget" has always evoked thoughts or ideas of deprivation. We use the term "Spending Plan" - semantics maybe, but it works. Your correspondent may want to try it.

That might even be worth thruppence. It sounds as if you know what you're talking about.

KiwiSaver age limit

I read an article you wrote and gained the impression that KiwiSaver was available to those over 65. Two providers say you have to be under 65. Could you clarify in your next article?

"Under 65" is correct. But if you join KiwiSaver between 60 and 64 you can take part fully - receiving the kick-start, tax credits and employer contributions - for five years from your sign-up date. So if you sign up the day before your 65th birthday, you are a fully fledged KiwiSaver until the day before your 70th birthday.

After the five years are up, you can withdraw your money at any time, but you can also continue to contribute. However, you won't get any more incentives - unless your boss is kind enough to keep contributing voluntarily.

Sorry if I gave you false hope. But if you have friends under 65, tell them to get in while the going is good.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her 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 mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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