We have $8.5 million in property and assets, do we have enough to retire? – Mary Holm

Mary Holm tells a reader it's "time to clamber into a hammock with a good book".

Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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 click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.

OPINION

Quitting time

Q: We are a couple who’ve been married for 48 years. I’m 72 and my wife is 69. She is retired and I continue to work, earning a salary of $200,000 in a demanding but nonetheless enjoyable job.

We own a modern mortgage-free and low-maintenance home with a current conservative market value of $4 million. We have late-model cars and no debts. We have $4.5m invested in shares (50% in NZ and Australian shares) managed through a sharebroker and $175,000 in cash. We reinvest all dividends, living off my salary and NZ Super. We don’t wish to move into a retirement home. We live well but also modestly, with no addictions apart from our daughter and our dog!

However, I’m feeling tired, and increasingly not enjoying the pressures of my job. For someone who said he’d never retire, time has caught up with me. However, I’m nervous about losing the security of my salary and further concerned if the share market underperformed. How can I retire and do so by reducing our financial risks? I’d like us to have a regular income (including NZ Super) of $175,000 net of tax.

A: Time to clamber into the hammock with a good book. You have way more than enough money to switch to lower-risk investments that will bring in more than the $175,000 annual income you want.

A basic rule of thumb about retirement spending is that for every $100,000 of savings, you can spend $100 a week – or $5200 a year – and your money should last until you die. And if it doesn’t last quite that long, many people report that by the time they get to 85 or 90, it’s easy to live on just NZ Super. If worse comes to worst, homeowners can get a reverse mortgage, which won’t grow too much from compounding interest at that stage in life.

You have $4,675,000 in savings, so you could spend $4675 a week, or $243,100 a year – and that’s before adding NZ Super. What’s more, that rule applies to someone retiring at 65. At your ages, you two could spend more.

Note that the rule doesn’t allow for your spending to rise with inflation. But NZ Super payments are adjusted each year to match either inflation or wage growth. And it’s common for people to spend less and less as their retirement goes by.

If you want more precise calculations, see the NZ Society of Actuaries’ Drawdown Rules of Thumb at tinyurl.com/NZRetire. They present four rules, and discuss their pros and cons and which ones suit which people.

They assume a person invests in a KiwiSaver balanced fund. These funds hold between 35% and 63% growth assets, usually shares, with most of the rest usually in bonds.

That’s not an ideal retirement investment plan. I recommend holding money you will spend in up to three years in a cash fund or bank term deposits, money for three to 10-year spending in a bond or balanced fund, and longer-term money in a growth or aggressive fund – so there’s time to recover from downturns. But the total returns would average out similarly to a balanced fund.

I suggest you use KiwiSaver funds. Their fees tend to be a bit lower than other similar funds, and they tend to be more closely regulated.

Note to other readers: I know, I know, this reader is way better off than most people. But please don’t complain. I tend to answer fewer letters from wealthy readers, but every now and then they should have their turn. And this reader really does need a push out of his stressful job!

Not so golden

Q: You mentioned last week that the rises and falls of shares are not being taxed. I would like to know whether the rise and fall of gold is now being taxed as income? It was not when I bought gold 30 years ago for my old age. I kept no receipts as it was not required in those days. Please advise.

A: Firstly, I was writing last week about tax on KiwiSaver and other funds. Almost all of these are PIEs (portfolio investment entities), which have the special tax rules I described.

But it’s different for gains on other share investments. In many cases, if you buy shares with the intention of selling them, your gains are taxable and losses deductible.

And I’m afraid the same applies to gold. “Where the investment is purchased with the intention of disposal (dominant purpose), the resulting gain is taxable or loss is deductible against other income,” an Inland Revenue spokesperson says. The length of time you’ve held the gold is not relevant.

While people sometimes try to avoid tax on share gains by saying the dominant purpose of buying them was to receive dividends, there’s no similar argument for gold, on which there’s no income until you sell.

This could, of course, be comforting news for you if you end up selling your gold at a loss, which you can deduct. As our graph shows, there have been quite long recent periods – from 2011 for eight years and from 2019 for three years – over which gold has lost value. But it seems highly unlikely the price will have dropped below your 1990s purchase price when you sell.

Still, Inland Revenue says, costs of your gold investment may be deductible, “such as interest on money borrowed to purchase the gold, insurance premiums, and storage costs”. That might help a bit.

I asked Inland Revenue, “What happens about the fact the reader has no record of what he paid?”

The reply: “Maybe your correspondent has information on the year of purchase (30 years ago) and could be using the average price of gold for that income year to ascertain a cost price. Gold is a commodity and will have a daily posted price. Alternatively, talk to Inland Revenue to seek agreement on an acceptable method to ascertain the cost price in the income year that the gold was disposed.”

For more information, see tinyurl.com/NZGoldTax.

Tax dodgers

Q: I live in New Zealand, but I’m a long-time US citizen and US taxpayer. If I was a Kiwi wage and salary earner, I would be demanding a capital gains tax, the lack of which, in a small country like New Zealand, moves too much of the tax burden to those who are least able to afford it.

I once overheard in Auckland, “Only poor people pay taxes”, which was truly callous and insensitive. But in the context of our tax system, it has meaning.

A: I’ve also heard comments like that. There will always be people who spend lots of time and energy thinking up ways to not pay tax. Earlier in my career as a business journalist, I often interviewed captains of industry, corporate lawyers, accountants and the like. It wasn’t uncommon to hear that it’s a challenge to “beat” the tax system. It was almost like a sport.

In recent Q&As, several readers have also commented on how many people support taxes that don’t affect them. But not everyone is selfish. Last year, nearly 100 wealthy New Zealanders told the Government, in a letter, that the wealthy should pay more tax. Maybe I’m naive, but I think most New Zealanders are fair about these things.

Your letter also commented on US income tax and CGT on homes. But I decided not to include that. Making fair international tax comparisons is incredibly tricky. On income tax rates, for instance, we need to take into account the United States’ state income taxes and sales taxes, and our GST.

Rather than making comparisons, I would like New Zealand to learn what works well in other countries – including alternatives to a CGT. Read on.

Tax land instead…

Q: Yay – you finally expressed in your column the one reason why I oppose a CGT. You stated, “We would need experts to work out what’s fair.”

Right there, the complexity of a CGT comes to the fore. Ask an appropriate expert what proportion of CGT revenue would be spent by IRD and taxpayers to ensure compliance. I believe such a cost proportion to be huge, therefore implying a realised CGT is a very inefficient way to increase revenue.

Excluding the “family home”, however that is defined, simply increases complexity, and reduces the revenue, even though you have stated the obvious reason why family homes must be excluded – to ensure people can still afford to change houses.

Of course, compliance costs associated with a wealth tax are even worse, requiring annual valuations of all sorts of different assets, combined with the need to find the money to pay the tax each year.

Let me upset everyone by suggesting instead a broad-based, low-rate, no-exclusion, land tax. Complexity is minimal, as local authority rating systems mean relevant valuations are usually readily available. Further, such a tax will assist in keeping house prices more affordable.

The worst effect is having to find the money to pay the tax each year, albeit local authority rates postponement plans suggest a solution to that issue for those challenged to find the money.

If you publish this, let the lions roar!

A: Not sure I can cope with more anti-tax roaring. But a land tax does seem to pop up as an idea from the experts every now and then.

It has its problems too, though. For a start, it’s tricky to work out how to fairly cope with both Māori land and agricultural land.

…Or transactions.

Q: I’m curious on your thoughts about utilising a Tobin tax on all transactions (including for example dividend share purchasing) in place of the current non-excise taxes.

I think such a tax could be fiscally neutral, negate the need for any other form of capital gains tax, be trivial to administer, and redistribute taxation in a fairer manner than the current income plus GST approach.

A: According to Investopedia, “The Tobin tax is a tax levied on spot currency conversions, with the intention of disincentivizing short-term currency speculation, named after economist James Tobin.”

“In contrast to a consumption tax paid by consumers, the Tobin tax is meant to apply to financial-sector participants as a means of controlling the stability of a given country’s currency.”

Wikipedia adds. “The proposed tax rate would be low, between 0.1% to 0.25%.” So I suppose a tax on all transactions wouldn’t impair most people’s financial dealings much – just those who trade frequently.

But I’m not the right person to judge this. And while I could consult experts, I’m not sure this would enthrall many readers.

Let’s just say it would be really good to see New Zealand consider not just CGT but other alternatives – including a land tax, a Tobin tax, and an inheritance tax, as discussed on October 12.

In that column, I quote Victoria University lecturer Jonathan Barrett, who writes about the heirs of home-owning boomers receiving “a currently untaxed bonanza. Ignoring this unprecedented transfer of wealth from people who no longer need it to people who haven’t earned it would be absurd”. Good point.

Different in Germany

Q: I note the comments in your last column about the virtues of the German rental housing system. Yes, they offer long-term rental contracts that provide security of tenure, stable rent, and personal expression within the rental property. However, this system significantly deviates from New Zealand’s rental laws and practices.

In Germany, tenants pay a bond equivalent to three months’ rent and, on top of the rent they pay, are also liable for all property costs, including local authority rates, insurance and utilities. Tenants must also fit out the interior, supplying and maintaining their own floor coverings, curtains, light fittings, kitchen cabinets and cooking appliances, while landlords are responsible only for the building’s exterior.

Sure, tenants can keep pets as of right, but if the cat scratches the wallpaper or the dog fouls the carpet, the landlord doesn’t care – it’s the tenant’s wallpaper and the tenant’s carpet.

In contrast, New Zealand law places substantial obligations on landlords, requiring them to provide, maintain and replace fixtures, floor coverings, curtains and appliances. Recent changes now also mandate landlords to install heating systems and cover accidental damage caused by tenants.

Would NZ tenants be willing to shoulder those responsibilities in return for similar benefits?

Recently, New Zealand landlords proposed introducing a similar long-term tenancy option under the Residential Tenancies Act, but that was rejected by the Government, citing a lack of demand.

A: Gosh, that certainly is different from here. Presumably, rents are lower, to compensate for fewer landlord obligations.

But I’m not convinced no New Zealand tenants would like that way of operating. It would be good to see it as an option.