Mary Holm: Don’t play it too safe - get your investments off to a fast start

How brave do you want to be when it comes to investing? Photo / 123RF

OPINION

Q: I’m 26 and just getting started in the world of investing. I have about $12,000 (plus KiwiSaver) in my bank account – some as an emergency fund and some to invest.

I am really keen to build up an investment so I can buy a house in the (hopefully) not-too-distant future, and then after that continue investing for my retirement. Was hoping you might have some words of wisdom for a beginner.

A: You’re off to a great start.

First, I assume you have no debt, except perhaps an interest-free student loan that you are steadily paying off. If I’m wrong, make paying off other debt your top priority. It’s the best move both financially and psychologically.

Next, good on you for thinking about rainy-day money. It’s hard to know how much you may need, but it’s a good idea to keep several thousand dollars in one-month term deposits, earning interest, and to use a credit card for any emergency spending. Your deposits will come due by the time you have to pay off the credit card debt.

OK, now to the more interesting part – saving for a home.

Assuming you already contribute enough to KiwiSaver to get the maximum employer and government contributions, you can do further saving in or out of KiwiSaver.

A low-fee managed fund will give you a wide range of investments, which reduces risk. So you might as well save in a KiwiSaver fund – as opposed to a non-KiwiSaver equivalent – as the fees tend to be lower.

Which risk level? The basic rule is that you shouldn’t invest in an aggressive fund – with most or all of its investments in shares and perhaps some commercial property – unless you don’t plan to spend the money for 10 years or more. And perhaps you hope to buy a home within the next decade.

That rule is because aggressive funds are the most volatile. Shortly before you plan to spend the money, your balance could plunge. In a big crash, it could even halve.

On the other hand, you’ll get higher average returns than in a lower-risk fund. And with those returns compounding over the years, it can make a big difference to your balance.

Are you brave? If so, jump on a motorbike and go for a ride in an aggressive fund, at least for the next five years or so. Then you could gradually move to lower-risk funds, step by step, as you approach buying time – ending in a defensive fund when you expect to buy within a couple of years.

If you come off your bike – the markets plunge – do not stop riding. Stick with it and things will come right, even if it takes a year or two. That will mean postponing your home purchase, but there’s no rush.

Chances are, though, that you’ll end up in your first home sooner than if you drive a safe little car – starting in a medium-risk balanced fund.

Whichever fund you choose, set up regular savings of, say, $100 a week – an amount that challenges you a little. Have that money automatically transferred from your bank account into your fund.

Keep in mind that if you had already owned a home, you would have had to cover not just mortgage payments but also rates, insurance and maintenance. It’s good to get some practice at coping with less spending money.

Every year, increase the amount by, say, $5 a week – more if you can. And if you get a pay rise, add most of that to your regular savings. I know, I know … your living costs are rising. But you managed the month before you got the pay rise. You can do it!

Set your sights on a modest first home, perhaps a studio apartment or a tiny home. You can “trade up” later. Or, if you buy something bigger, consider having flatmates. That can make a big difference to affordability.

One last point: despite conventional wisdom, home ownership is not the only way to do well financially. If house prices take off into the ether again, you might want to stay on the sidelines and keep steadily saving.

As long as you reach retirement with either a mortgage-free home or large savings to cover your accommodation in retirement, you’ll be fine. You could buy a home then, or you’ll have plenty to keep renting.

Property plunge needed

Q: I see a correspondent to your column last week suggested property values need to fall 50 per cent. Right on! That simply brings values back to historic income multiples around three to four times.

I have been saying the same for some years now to anyone who would listen, albeit most who hear me are shocked when I say a 50 per cent fall is needed.

For the record, I already own my house, so I (and my heirs) would also suffer the loss in value. But then, my heirs might not have to wait for me to die before they could buy a property.

A: A halving of house values seems unthinkable. But let me tell you a story. In the late 1980s, prices in some parts of Auckland dropped 30 per cent. I know. I was a “victim”.

We bought a house, in blue-chip St Heliers, shortly before the 1987 sharemarket crash for about $380,000 and sold it a year or so later for about $260,000.

To put those numbers in the current context, imagine a house that cost $3.8 million selling later for $2.6m.

Apparently, many people in that part of the city were badly hit by the crash and needed to move to cheaper homes, so there were lots of properties on the market. And we had made the classic mistake of buying – elsewhere in Auckland – before we sold, so we needed a quick sale. Lessons learnt:

• Don’t buy before you sell, especially in a wobbly market.
• Selling in one part of a city and buying in another doesn’t necessarily mean you are staying within the same market.
• House prices can fall far.

Oh, and I like your point about heirs losing on the inheritance but gaining on affordability.

Property numbers challenging

Q: Interesting points you make in the housing article last week. I do need, however, to point out that you have left income tax out of your landlord’s calculations. Take 30 per cent off your figures and your borrowing power is somewhat muted.

Also, note that buy-to-let LVR (loan-to-value ratio) regulations require purchasers to have much larger deposits than owner-occupiers.

A: The calculations were actually by the correspondent, who was just looking at the situation broadly, rather than in detail.

Still, your comments add to his point – that the numbers don’t work for a landlord unless they make a considerable capital gain. More on this next week.

Residential care rules

Q: I have read in one of your recent columns about gifting assets and then applying for the residential care subsidy.

I have read all the info on the websites but I cannot find any mention of what happens if you gift, say, $250,000 to your grandchildren and after this have no money left.

Presumably, this amount of money is added back to your asset base, so you do not get the subsidy.

However, if you now have no money, how are you expected to pay for the residential care? Does Winz sue the grandchildren to get the money back? (This last comment in jest.)

A: Something tells me taxpayers wouldn’t be happy to see the Government spending money on such lawsuits!

But in your scenario, you might find yourself pressuring your whānau to step in and help you financially.

“The client would qualify for a subsidy when their asset sum falls below the applicable threshold and this includes the sum of excess gifting,” says Paula Rātahi O’Neill of MSD.

She gives an example of someone using the $273,628 asset threshold when applying for the subsidy.

“If a single client gifted $200,000 above the $7500 yearly limit, within the five-year gifting period, their total sum of other assets would need to be at or below $73,628 to give them a combined total below the asset threshold and, therefore, qualify for the subsidy.

“If the amount of gifting within the five-year gifting period is greater than the asset threshold, they will not qualify for the subsidy.

“Excess gifting outside of the five-year gifting period is assessed differently, and anyone who has questions about this should call MSD to discuss their individual circumstances.”

She adds: “If a client does not qualify for either the residential care subsidy or a residential care loan, then MSD does not have any further involvement, and the matter of paying rest home fees is between the client and the residential provider.”

What is a residential care loan? It’s interest-free and secured by your home. It’s usually repaid when the house is sold or when you die, whichever comes first. See tinyurl.com/ResCareLoan

Subsidy strategies

Q: Our family went through the residential care subsidy process three years ago for our mother.

Mum and Dad (now deceased) had changed their joint family home ownership to tenants in common 20 years ago. When it came to selling her home, the assets were split in two, half for Mum and half to her children. This entitled Mum to a full subsidy.

We didn’t take our half as it needed to be invested to pay the $1600 per month shortfall between the subsidy and the actual rest home care fee.

Of course, this process would not work if the beneficiaries of the deceased parent were not on good terms with the parent and insisted on taking their share.

A: Indeed. It seems this has worked well for your family. But before other readers decide to do the same thing, two experts have reservations.

“Under the current residential care subsidy settings, changing the ownership of a property from joint ownership to ownership as tenants in common, to ensure assets will be below threshold B ($273,628), may be successful. This change in the manner of ownership is not currently regarded as deprivation (as there is no change to the interests held by the couple as an economic unit),” say Vicki Ammundsen, of Vicki Ammundsen Trust Law Ltd, and Theresa Donnelly from Perpetual Guardian, and previously MSD.

But, they add: “This is current practice in terms of use of discretion and not policy or law. MSD could change its practice and view this as deprivation in the future.

“More importantly, people must keep in mind that this could compromise the survivor’s ability to remain in the family home, and could reduce the assets available to the survivor and compromise their lifestyle moving forward.

“There also needs to be a reality check as to who is paying rates, maintenance and insurance to support whether there has been a genuine bequest pursuant to the deceased parent’s will. If the survivor simply continues to pay 100 per cent, was it ‘simply for the residential care subsidy’ or genuine? At present MSD has no position on looking under the hood of a change to tenants in common, but it could do so.”

Divorce the answer?

Q: Would the woman last week whose husband has Alzheimer’s, and is in residential care, be better off if she divorced him?

I am sure when she took her marriage vows, she did not expect to be in the financially worrying position that is facing her in the future.

A: I agree that the woman’s situation is distressing. But your idea wouldn’t work unless she actually left the marriage, as opposed to just going through the process. See tinyurl.com/RelationshipMSD for how MSD decides if you are in a relationship.

I’ve received lots of other emails asking about the residential care subsidy and the gifting rules. An MSD spokesperson tells me everyone’s situation is different and the best approach is to discuss your circumstances with them.

You can contact MSD’s Residential Subsidy Unit by calling 0800 999 727 or by emailing msd_rcs@msd.govt.nz

- 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. 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.