Mary Holm: First step - Pay off the mortgage

It's always possible Auckland Airport shares will take off - but a crash landing is possible too. Photo / Greg Bowker

My wife and I have a $160,000 fixed-rate mortgage, which is up for renewal next year.

Our medium-term job prospects are uncertain. I'm working part-time and my wife is working full-time; however, in a year's time my wife may also be forced to work part-time, which will impact on our ability to meet mortgage payments.

We have a share portfolio valued at $120,000 that includes a substantial number of Auckland Airport shares.

Obviously if we put all of this into the mortgage next year it would take the pressure off considerably. But we may miss out on considerable capital gain in a strengthening share market.

Yet clearly we will save on future mortgage interest payments, which may offset this to some degree. The shares were intended as our retirement nest egg.

If you knew for certain that the share market would continue to grow, you should not only keep the shares but also sell your house and put the proceeds into shares. You could buy a bigger house later and have plenty left over.

But that's a big "if". The New Zealand share market has indeed performed well in the past two years, already regaining more than half the global financial crisis plunge. But - as always - nobody knows where it will go from here.

That's why I always say, "Get rid of your mortgage before you do any serious share investing - unless you invest through KiwiSaver with its powerful incentives". Your net worth - which measures how well off you are - equals your assets minus your debts. So reducing debt has the same effect as increasing assets.

More specifically, repaying your mortgage boosts your net worth in the same way as holding an investment that earns the mortgage interest rate - after all costs and taxes. It's true that shares might earn more than that, but they might not. By comparison, repaying debt is risk-free.

With your iffy job outlook, mortgage repayment is even wiser. Having a nearly mortgage-free house makes a huge difference if your income is slashed.

You might want to phase the sale of your shares over, say, 12 months - so that you get to sell some at close to the year's best price.

Once you are mortgage-free, by all means get back into the market. But next time don't let one share dominate your portfolio. That boosts risk without boosting expected returns. If you haven't got enough money to diversify, invest in a share fund that will do that for you.

PS: Don't come crying to me if Auckland Airport shares take off - excuse the pun - after you sell. That's always possible. But so is a crash landing.

Funding a home

I am 21 and in my final year at university. I am also a KiwiSaver member, currently in a popular growth fund. This always seemed like a reasonable option as retirement is so far away for me.

However, I recently realised that I would most likely wish to use my KiwiSaver funds to purchase my first home (hopefully within the next three to five years).

Does this mean I should be in a conservative fund? Or does it not matter much, as I would only be eligible to withdraw some of my KiwiSaver funds and not the whole lot?

Your thinking is spot on - higher risk for long-term money and lower-risk for money you are likely to withdraw in the next few years. But what about the half-pie situation?

When you buy your first home, you can withdraw all the money you and your employer have contributed to KiwiSaver plus all returns. Only the Government's kick-start and tax credits must stay in your account.

Depending on whether you have been working while studying, the Government contributions might make up the bulk of your savings so far. But that will probably change once you graduate. In three to five years, your first home withdrawal will probably be well over half your KiwiSaver money - and it's the portion of your balance that fluctuates with the markets.

Your current fund probably invests largely in shares and, as I say above, anything can happen in those markets over the shortish term. It would be a pity if money you were counting on for a home purchase diminished. So yes, I suggest you move to a lower-risk fund until after the home purchase.

Hopefully you will also be eligible for the first home subsidy, of $3000 to $5000. For rules on that, see www.hnzc.co.nz/kiwisaver

Note that there are minimum contribution levels for the subsidy - 4 per cent of your income from July 2007 to March 2009, and 2 per cent after that. For beneficiaries, it's 4 per cent and then 2 per cent of your benefit, and for non-earners, it's 4 per cent and then 2 per cent of the minimum wage.

Disillusioned

When KiwiSaver was introduced, by joining it I assume I entered into a contract with the Government to contribute as per the rules provided.

Those rules have now been changed, and I don't agree with them, so therefore I should be able to withdraw my funds and discontinue my contributions without penalty. I believe that the contract that I signed up to has been broken.

Through no fault of mine I am severely discriminated against, as I am an ACC beneficiary. I will never be able to work again, so I will never be able to obtain the employer contributions, so all I can obtain is the small tax credit.

I think I would be far better off just putting my $125 a month straight into a Rabobank term deposit - no fees, no costs, no risks.

Looking into the future I can see governments changing KiwiSaver into a waste of time. Why is it that the standalone and self-employed are always screwed by successive governments? Will be interested in your thoughts.

Funny that. As a self-employed person I reckon I get a good deal from KiwiSaver.

Unlike employees, who commit for a year, I haven't had to commit to contributing anything. But I've chosen to put in $87 a month and, with the tax credit matching that, my return far exceeds what I could earn on any bank term deposit. Even after the tax credit drops to $521, I won't be able to beat it elsewhere.

You're contributing somewhat more, and I suggest you cut back to $87 a month. You don't get any incentive on the extra $38, so that might as well go into a term deposit where you'll retain access to it.

Sure, you and I miss employer contributions. But that money comes out of employers' total labour costs, which suggests employee pay is lower than it would have been without KiwiSaver. In other words, employees in and out of KiwiSaver in effect pay the employer contributions - except in workplaces in which only KiwiSaver members specifically cover those costs.

Your situation sounds tough, and my heart goes out to you. But KiwiSaver is not contributing to your misfortune. The opposite. Good on you for joining, hang in there, and make the most of it.

On the question of contracts with the Government, the next letter addresses this rather well.

Stop the whining

I'm sort of hoping you will reduce the myriad of repetitive, ill-informed letters from whiners about the KiwiSaver changes.

The contributions are ours, in our name. The Government can't take them off us. And one of the beauties of our political system is that no Government can bind a future one so there is no permanent "contract" in place.

Imagine if Muldoon's top tax rate of 66 per cent was set to be irreversible. The tax breaks, rules, etc, are at the whim of the government du jour, which we elect or dis-elect.

In summary it's still free money so the average punter should take it. And it's tied up until a retirement milestone is reached, so the average punter should only put in enough to secure the free money and not a bean more (unless you're a perpetual non-saver, perhaps).

As ever there are a few exceptions in the fine print, but on the whole perhaps some of your readers might kindly bore us less and reserve their petty complaints for the election.

Well put. But the "whiners" aren't always ill-informed. It doesn't hurt to air the downsides of KiwiSaver.

And when they have got their facts muddled, surely it's good to correct them. With more than half the eligible people not yet in KiwiSaver there are clearly still lots of misunderstandings.

Investment advisers

You said in the column two weeks ago that you don't have faith "in anyone's ability to pick shares, bonds, property or whatever", when agreeing with your correspondent's rhetorical question: "Why would any sensible person give their money to someone else to manage?"

It might be worth clarifying to your readers that the "share pickers" you were referring to are fund managers (for example, AMP, Tower, Fisher Funds, etc), who manage and tout for sale funds such as unit trusts and KiwiSaver funds.

Investment advisers, who deal face-to-face with individual clients, offering personalised investment advice, select funds and other investments for their clients and recommend appropriate mixtures of investments - "asset allocation". They make judgments about the merits of index funds versus managed funds, shares versus bonds, property versus gold, etc.

I imagine that you did not mean to suggest that professional investment advisers have no role to play in the management of people's money.

I believe that numerous US surveys indicate that the average unadvised share market investor performs worse over time than the average advised share market investor, for all sorts of reasons to do with adviser experience and investor psychology.

You're right that I wasn't saying advisers have no role in managing people's money. But that doesn't mean I have faith in their ability to pick shares, bonds and so on.

A good independent adviser can indeed help with asset allocation and fund selection, with the latter hopefully based largely on reputation and size of fees - and emphatically not on how much commission is paid to advisers.

And if the client wants to invest directly in shares or bonds, a good adviser should tell him or her to diversify widely, to invest for the long term and not to panic in downturns. Such advice probably leads to the survey results you mention.

But I would not like to see an adviser choosing particular shares or bonds for their clients. In fact, I would expect their ability to be considerably inferior to fund managers'.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director 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.