Money on deposit gives a tenant enough to get by without worrying - and enjoy the occasional treat. Photo / Getty Images
COMMENT:
Q: Due to a change in circumstances, I find myself renting for the first time in my life. I am 71 and worried about what to do to ensure my finances last.
I have $500,000 in the bank on term deposit. I have considered buying but like the idea of having none of the worries of home ownership.
My monthly income is $1207 in interest from the term deposit and $1644 in NZ Super. After paying regular monthly bills including rent, I have $924 a month for food, petrol and everything else.
It has been suggested to me that I put $10,000 into an account and pay myself $200 a week to supplement the living money. And do this each year?
I am worrying myself sick over this.
A: That's not good and not necessary.
Normally I encourage retired people to own their own home if they can. Home ownership gives you a feeling of security and more control over your environment.
But the downside is that you tie up money in the house that you could be spending. And in your situation that will make a big difference to your quality of life. Given that home ownership doesn't appeal to you — and in some places $500,000 won't buy much anyway — let's go with your preference to keep renting.
The suggestion to withdraw $10,000 a year is basically a good one. The trouble is that your monthly interest income will diminish as the $500,000 diminishes. That means you'll need to withdraw more each year to make up for that difference.
There's nothing wrong with that. The money is there to spend. But it may be hard to keep track of, so let's find a simpler way.
First, move the money into a cash fund when the term deposit matures. Your bank will probably offer one. They are low-risk, and the returns will be similar to term deposit returns. But you can reinvest your interest rather than taking it out each month, and you can withdraw whatever amount you need when you need it.
I suggest you plan to use $450,000 of your $500,000 by the time you are 91. The other $50,000, plus compounding interest you earn on the whole lot over the years, is there for emergencies or to supplement your NZ Super in your 90s. Many people say NZ Super is enough at that stage, but you'll have rent to pay so it's good to have a buffer.
If you divide $450,000 by 20 years, you get $22,500 a year. Withdraw it in monthly lots of $1875 or weekly lots of $432, whichever suits you.
You may say you want your withdrawals to grow a bit each year, because of inflation. But your NZ Super will rise each year — currently by more than inflation.
And retired people tend to spend less as the years go by. So I suggest you raise the amount only when your expenses rise noticeably — perhaps if you face a large rent increase. Raising your withdrawals will eat into your buffer, but that's what it's there for.
There's an alternative to all this. You could put the money you're not planning to spend in the next few years into a riskier investment, which over the long term will almost certainly give you more money.
I sense that you wouldn't feel comfortable doing that, but how about finding a financial adviser you trust who would help you? With half a million dollars to invest, plenty of advisers would be keen to work with you.
If you like this idea, have a look at the Advisers page on maryholm.com, check the websites of some advisers listed there, and meet with ones who appeal to you. You will have to pay a fee, so ask about that in advance. Despite the fee, you will probably end up with more to spend.
Whichever route you take — with or without an adviser — you'll be fine. Please stop worrying and start giving yourself some treats.
Q: Just a comment on your reply last week about getting the maximum KiwiSaver government contribution. Among other things you said, "Remember, this gives you free government money".
I do not agree with you. What it gives you is money from other taxpayers. It is redistribution of income. I am not saying it shouldn't happen.
A quick comment on hardship withdrawals. I volunteer in a Citizens Advice Bureau and as a JP, and the number of hardship withdrawal applications saddens me.
I really think the savings should be locked in and not available for debt repayment or even bankruptcy, only subject to not having been fraudulently put into the account to avoid paying debt. Those who probably most need the savings seem most likely to have difficulties.
A: Fair enough on "government money". I often point out where it comes from, but I didn't last week.
On hardship withdrawals, I can see where you're coming from, but I don't agree with you.
I expect lots of people might not take part in KiwiSaver — or contribute as much — if they didn't think they could access the money in an emergency.
Indeed, if they couldn't, I would be suggesting people build up more of a rainy day fund before contributing much to KiwiSaver. And that would be a pity, as most of the time they wouldn't get such good returns on that money.
Access to emergency money — in or out of KiwiSaver — is so important. I see too many people managing their money pretty well until something goes wrong. The car "dies", or the roof springs a leak, or someone needs expensive dental work. That's when they get into debt, often at high interest rates, which they can't pay off quickly. The debt then mounts until they are in serious financial trouble.
If KiwiSaver money can rescue them, I think that's a good use for it.
Q: It was interesting to see your comments last week about the NZ sharemarket, and even more interesting to see the graph showing the NZX50 growing significantly over the past five years compared with overseas markets.
I started out, on my own, to invest in shares two years ago, with a long-term view (even though I've just turned 70) and a 10-stock diversified 60/30/10 passive/growth/speculative portfolio, with six stocks in New Zealand and four stocks in Australia. In this short time the portfolio is averaging 9 per cent a year, which is my optimum outcome over the next 10 years-plus.
I was quite staggered to see the graph. To me, that sort of growth would point to the prospect of a massive correction, in the near future, just based on the graph alone. I also note that the NZX50 PE ratio (on the index page of the same issue) is 112.33, which is massively overpriced.
Am I right in thinking that there is a correlation between the graph and the PE ratio, and that there is a very strong likelihood that the NZ market will correct in the near future, or is this just a reflection of the current volatility in the equity market?
A: The PE ratio — or price to earnings ratio — and the rising market must be correlated, given that they're both about prices. But on what will happen next, I don't know.
That's the second week in a row I've confessed to my ignorance! Last week the question was basically, "why has the NZ sharemarket done so well?" and this week it's, "will the boom continue?"
So why publish questions I don't know the answer to? To make the point that nobody else does either, despite plenty of people saying they do.
Think about it. If somebody knew when the sharemarket would rise and fall, they would be worth billions of dollars. They could buy before each boom and sell before each crash, taking all the gains and none of the losses.
What's more, they could run KiwiSaver and other funds that would attract millions of investors because of their fabulous returns, and make heaps more from fees.
"Okay", you might say, "but I'm not asking for perfect forecasting — just the likelihood the local market will plunge." The answer to that is it's certain to happen. But nobody knows whether it will be next Monday or 20 years from now.
If you look at last week's graph, you might have thought back in, say, 2015 that there had been big growth and it was time to sell your shares and sit on the sidelines. But look at the further gains you would have missed out on since then.
You've approached direct share investing well — buying a fairly large number of varied shares. And you have an investment horizon of at least 10 years. Great.
But please don't try to time markets in the meantime. You might get lucky and sell just before a downturn. But when should you get back in? You won't know a serious upturn is under way — as opposed to a blip — until it's been going for a while and you've missed out on those gains. And how do you know the upturn won't stop tomorrow?
Not even the professionals keep getting market timing right, year after year, to the point where it's worth the hassle and expense of selling and buying again, repeatedly.
You've had good luck so far, buying into a boom. But you need to be prepared to see the value of your portfolio plunge at times, and not bail out. Hang about and it will rise again.
Q: Your recent Q&A about KiwiSaver funds got me thinking, as I have been with Milford for 10 years or more.
So I set about researching the other fund managers you mention, but what did I find? Not one of their websites gave specific returns over the past five years, which Milford records on its website.
They did say what their fees were or how they charge their fees, but as to returns, they just said something like, "Our balanced fund or moderate fund returns 5 to 10 per cent a year". The BNZ just said phone and talk to our investment team.
I would never invest my hard-earned money in such an airy-fairy company. I suggest they all need a good backside kick if they want to get new business.
A: Steady on. This column is a No Violence Zone! And in any case, I found the returns on the three low-fee providers' websites with no trouble.
Two of the providers — Simplicity and Juno — have been around for just a couple of years, so they have returns for only that period. But the BNZ has longer-term numbers.
I wouldn't take much notice of past returns anyway. Research shows over and over that funds that have done well in the past won't necessarily do well in the future. In fact, there is a slight tendency for top performers to do worse than average in the future.
Having said that, past returns have two uses:
• You can rule out a fund that has repeatedly performed below average. It may be badly managed.
• You can get a feel for the range of a fund's returns, compared with other funds of the same type. If one fund has higher highs and lower lows, it's more volatile.
But beyond that, it's better to choose on the basis of fees rather than returns.
- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her latest book is "Rich Enough? A Laid-back Guide for Every Kiwi", and 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. 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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The New Zealand sharemarket reached its highest level in a month.