Still, most people like to have a bit more than NZ Super in their retirement. It's nice to be able to have the heater on full power on a cold winter evening.
So, are Bonus Bonds the best place to save for extra retirement expenses?
Bonus Bonds bill themselves as "the much more fun investment". And when you look at the monthly prize list -- one prize of $1 million, one of $100,000, one of $50,000 and "multiple" smaller prizes -- it looks enticing. What's more, the prizes are tax-free.
"For over 40 years, Bonus Bonds have paid out millions of cash prizes totalling more than $2 billion," says the blurb.
But the bonds pay no interest. How much fun will it be when you realise your investment has made a zero return for several years? And with inflation -- albeit low these days -- your money isn't just going nowhere, it's going backwards in terms of what you can buy with it.
Let's say you want to spend your $50,000 over 20 years -- at $2500 a year -- after which you'll live off just NZ Super. If inflation over the next 20 years continues at the same pace as over the past 20 years -- which is probably as good a guess as any -- at the end of that period your $2500 will buy you less than two-thirds of what it buys now.
That is, of course, unless you win a prize.
A while back on Fair Go, a reporter watched while two people who had owned Bonus Bonds for decades checked to see if they had won anything but hadn't heard about it, because they had changed address. Nope. Then the reporter tried for herself. No again.
I'm sure she was hoping at least one of them would come up with some sort of prize. But sadly, a zero return is pretty likely.
In August, the chance of a Bonus Bond winning a prize was just one in 18,943, says a Bonus Bonds brochure.
The chance varies from month to month, depending on how many bonds are in the draw and the investment performance of the money put into Bonus Bonds -- more on that in the next Q&A. But don't expect improving odds any time soon. "For most prize draws over the next year, we expect that the chance of any Bonus Bond winning a prize will range between 1 in 20,000 to 1 in 35,000," says the brochure, which was published in September.
Of course, the more bonds you have, the bigger your chances of winning. But still, those are long odds.
Putting it in financial terms, over the years average returns on Bonus Bonds, including prizes, have tended to be lower than on bank term deposits. Given that the bond returns are less certain -- they vary widely and most people get nothing each month -- we would expect the returns to be higher to compensate for that risk. The fact that they're lower makes them a lousy investment.
Sure, bank term deposit returns are low, but they are higher than inflation. So if you put your savings there they will grow a bit in terms of buying power. You could even try something riskier but with probably higher returns, such as a share fund, for the money you don't plan to spend for 10 years or more. But I sense you want to keep things simple.
Oh, okay, put a couple of thousand in Bonus Bonds for the fun of it. But not the lot!
Kids and Bonus Bonds
Q: I am writing to ask about children saving with ANZ Bonus Bonds for their education when they reach university age, for example. With the current unrest around the world, what are the risks involved with having their savings tied up in Bonus Bonds for the future?
Our relatives have always gifted the children money for birthdays, etc, so they learn to save it, and they get excited when purchasing their Bonus Bonds, and also if they may win a small amount to reinvest.
A: What happens if one child wins $1 million? Maybe they should all sign an agreement to give their siblings a portion!
That's pretty unlikely, of course. And so is a scenario in which world unrest leads to a depletion in the kids' uni funds. So how safe is their money?
Bonus Bonds are run by the Bonus Bonds Trust. ANZ Investments is the manager of the trust, but ANZ "does not stand behind or guarantee the trust", says a Bonus Bonds brochure.
It adds that, "Investments are subject to investment risk, including possible delays in repayment, and loss of income and principal invested."
Sounds worrying, but don't panic. The money put into the bonds is conservatively invested in securities issued by the Government, some local authorities, New Zealand registered banks and some lower-risk corporates.
What's more, "The Bonus Bonds investment portfolio is rated AAf by independent credit rating agency Standard & Poor's, which indicates that the 'Trust Fund's portfolio holdings provide very strong protection against losses from credit defaults'," says the brochure.
In other words, there are no guarantees but your children's money seems to be pretty secure. But, as stated above, if they win no prizes their buying power will decrease. Over a couple of decades, that's not to be ignored.
KiwiSaver withdrawals
Q: I was reading your October 31 column and write to request that Mercer KiwiSaver be added to the list of providers that offer regular withdrawals in retirement.
I've finally found room to squeeze your letter in. The list now reads: AMP, ANZ, ASB, Civic, Fisher, Grosvenor, Kiwi Wealth, Medical Assurance, Mercer, Milford, NZ Anglican Church, SuperLife and Westpac.
Buying a homeAbout 18 months ago, I wrote to you reporting on "the idiocy of my youth", which eventually saw me without a property of my own in my late 50s.
Your reply to me -- suggesting I could still buy an inexpensive home -- ended up setting me on a different track. After using my salary to push $68,000 into my KiwiSaver account, I discovered that BNZ was more than happy to give me a mortgage on a stunning two-year-old property in Ngaruawahia.
As a cautious soul, I agreed to a fixed two-year mortgage, with an increased premium due to my "loan to value ratio". This timeframe gives me the opportunity to see how able I am to manage this new financial scenario. Naturally, I have a hope that my fixed interest rate (5 per cent) will reduce by 0.45 per cent as my equity rises?
My settlement date is exactly one week before Christmas Day, and I can't think of a more exciting Christmas gift. It just goes to show that what we think about money, mortgages and timeframes is not always correct, and it pays to get things checked out.
Hopefully, this might encourage other people in my circumstances and age bracket to have a rethink.
I'm so pleased that I wrote to you. You set in motion a chain of events that have led to a very happy Christmas. I shall definitely be raising a glass of Christmas cheer to you, Mary!
A: And I'll raise a glass to you, with thanks for a heart-warming letter. I can picture you looking proudly around your new dwelling as you read this. Well done for making it happen.
Just keep in mind that while your mortgage interest might drop as you pay down your loan, at some point all mortgage rates are likely to rise. They're at unusually low levels these days, and it can't last forever.
Then again, if you'd stayed renting, your landlord could have raised your rent, or kicked you out. You are now boss of your own domain. Yay!
This is my last 2015 column. A big thanks to all the people who have written to me this year -- especially the many whose letters haven't made it into the column. It's still really helpful to hear from you.
Hey everyone -- be careful, be kind and be thankful this Christmas for all the good stuff we New Zealanders enjoy. See you again in late January.
Mary Holm is a freelance journalist, 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 opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's 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.
