A: You certainly have been lucky, although to some extent you've made your own luck by being willing to move to a small town.
Generally, I don't think it's a good idea to try to time markets - guessing when it's clever to buy or sell property, shares or other investments. People get it wrong so often.
But I make an exception for the current Auckland property market. I agree with you that buying a rental property in Auckland now is pretty risky. You wouldn't be taking nearly as big a risk as many because, with your $650,000, you could buy a property with little or no mortgage. But still, it would be sickening to see the value of your recently bought property falling.
I'm also not a big fan of owning rental property away from the area in which you live. Trying to organise repairs and maintenance from a distance, or driving to do it yourself, can be a hassle. Ditto if you have problems with tenants. You could hire a property manager, but that eats into your returns.
On the other hand, perhaps you could buy a rental - or maybe two or three - in your home town. The properties would be nearby, you would be more diversified by owning several properties, and it sounds as if prices haven't been soaring there.
The downside is that you would still be heavily invested in property. You can reduce your risk by investing in a variety of assets. So let's look at some other options.
Firstly, I wouldn't leave the money where it is. That's not because there's much danger of losing it. As the Reserve Bank said in this column recently, "the likelihood of a bank failure is very low. The Reserve Bank of New Zealand regulates all banks in New Zealand and requires them to hold levels of capital and liquidity that act as a buffer against the likelihood of failure."
However, if you're thinking of using the money as retirement savings, you've probably got a good 20 years before you'll be spending it. That means you could invest in a fund that holds mostly shares. The balance will sometimes fall - when the markets go down. But over 20 years it will almost certainly grow more than in bank deposits.
Too worrying for you? How about a balanced fund? That will typically hold about half shares, perhaps some commercial property, and about half bonds, which are lower risk. Such a fund probably wouldn't grow as much, but nor would it fluctuate as much.
The easiest way to find a suitable fund is through KiwiSaver. If you are not in the scheme, I strongly suggest you join. If you are already in, you could simply add half the $650,000 to each of your accounts. Or, better still, you could ask your provider what non-KiwiSaver funds they have and invest in one of those, so you retain access to the money in case you need it before retirement.
Your provider should be happy to help you with this, including giving you guidance on the different risk levels of different funds. If they're not helpful, get back to me and/or move to another provider. You will be big investors for them, and certainly deserve some attention - which is not to say smaller investors don't deserve attention too!
One more point: people who claim I'm anti-property may say that it's just as risky these days to place a large sum in a share fund as in a rental property - given that shares have also risen dramatically over the last few years. And they might be right. Perhaps the share market is also riding for a fall.
In light of that, if you decide to put the money in a share fund or even a balanced fund, you might want to drip feed it in - perhaps in three or four lots spread out over a year. Meanwhile, keep the rest in bank term deposits or a low-risk KiwiSaver fund. That way, if the share market does fall, you won't have invested the lot near the top of the market.
The option to drip feed isn't generally available when you're buying a rental property. It's all or nothing on one day, which is one reason rentals can be riskier than shares.
Breaking the mortgage
Q: We are in our mid-thirties with a handful of young kids. Hubby has a full-time salary of $150k and I contract part-time and earn $180k a year pre-tax.
We have sold our Auckland house and are moving south to be close to family. Hubby will work from home, and there is plenty of work for me.
We've purchased a new house and will be mortgage-free with $220k left over after paying off all of our mortgage. It should be noted that we currently have a fixed term mortgage of $240k that is going to cost $11k to break. This is on a low interest rate with four years remaining.
We're not sure what to do with our money. Our goal is long-term investment and retirement income.
As it's going to cost so much to break our mortgage, we're thinking that instead we could use the mortgage to buy a rental property. This will also offset hubby's tax.
Would we be better to invest where we believe there are long-term capital gains but the property purchase price is higher, or go for a market where the price is lower and there is a higher rental return? Hubby thinks long-term property is going to correct itself, but I'm not so sure.
Or would you recommend doing something else with our money - breaking the mortgage and having $220k invested elsewhere?
A: My recommendations are the same as for the previous correspondents. Like them, you could perhaps buy a rental property near where you will live. You would then avoid the substantial $11,000 mortgage break fee.
But beware of letting that fee drive your decision. That would be the tail wagging the dog.
You're done really well financially by moving out of Auckland. I suggest you just accept the break fee as the price of making that big gain and invest in a share fund - as explained above.
You two are 10 years younger than the previous couple, so there's an even stronger case for going into a share fund that's likely to grow healthily over several decades.
P.S. I loved your "handful of young kids". They certainly can be a handful. But I do hope you know how many you have!
KiwiSaver subsidy
Q: Do the KiwiSaver rules allow someone to not contribute through payroll the minimum 3 per cent any longer, but to just contribute an annual lump sum of $521 and still receive the government top-up match? Effectively doubling my money through that?
At our company we have two superannuation options.
I can then take my total company 4 per cent match and put it all into the more flexible scheme than KiwiSaver. (The other scheme is currently only getting 1 per cent from me).
A: Your idea is good, although you have a few details wrong.
As long as you've been in KiwiSaver for at least a year, you can take a contribution holiday - by filling out a simple form - which will stop your payroll contributions. You can then contribute any amount you like directly to your provider.
However, the amount you need to contribute to receive the full $521 from the government is $1043. Your money isn't doubled, but subsidised to the tune of 50c for every dollar you put in. It used to be doubled, but that stopped several years ago. But the tax credit is still well worth getting.
You might want to set up an automatic contribution from your bank account of $20 a week or $83 a month to get the correct amount into KiwiSaver. That makes it pretty painless.
Others with a work super scheme might want to consider doing something similar.
Just one warning: make sure fees aren't higher on the other scheme. That can eat into your retirement total.
Super for whom?
Q: After the letter about foreign pensions last week, I decided finally to react!
I have only one question for the IRD: is it fair that if you come to NZ when you are over 50 for "family reasons" or work, you get a full pension when you are 65?
For me, those people are more privileged than when you get some extra pension from overseas after being here for 30 or 40 years. And for NZ people who are born here it is very unfair!
A: Firstly, it's not Inland Revenue that runs NZ Super, it's the Ministry of Social Development. But there's not a lot of point in asking them about this issue either. This is a decision made by Parliament.
The rule you're referring to says: "To get NZ Super you must have lived in New Zealand for at least 10 years since you turned 20. Five of those years must be since you turned 50."
I suppose the thinking behind it is that NZ Super is very inclusive. For example - unlike state pensions in many other countries - recipients include people who have never paid a cent of tax in their lives. Presumably, the politicians who voted in the 10-year and 5-year rule wanted immigrants to also be covered.
However, you're not the only one to criticise the rule. Others say it's too generous, and I take their point. I wouldn't oppose a toughening up of the rule - perhaps giving people who have spent most of their adult lives out of this country a lower rate of NZ Super, at least for the first five or 10 years.
But I disagree that these people are more privileged than those who would receive extra income from an overseas state pension if that were allowed.
The basic idea - that practically every older person gets a state pension, but at the same time younger taxpayers don't pay more than is necessary to do that - is a good one. More on this issue next week.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, 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.
