Mary Holm: How many assets are enough?

Rentals, KiwiSaver, money in the bank - is it worth borrowing to get even further ahead? Photo / Getty Images

COMMENT:

Q: We are a married couple in our mid-40s and over the past 25 years have managed to build our wealth to where we are comfortable and the kids can do activities and get an education, etc.

But we have been a bit stale lately as we are not sure what to do. I'm paying $10,000 to $12,000 in provisional tax for income from rental properties. We have no debt, so we've been spending more but also saving, as it's a hard habit to break.

We have three-and-a-half mortgage-free properties (one half is a holiday home with my father) and a combined $150,000 in our KiwiSaver accounts, $250,000 in index and managed funds and $190,000 in term deposits.

With 12 to 15 years till we retire, should we take on more debt? Some say you should be 50 per cent in debt to make money work for you. Is it bad to have no debt for this long?

A: It's never bad to have no debt.

The view that debt is good comes from people who have borrowed to invest, often in rental properties, and the property values have soared. They got the gain on the borrowed money as well as their deposit. It's how some people get very wealthy.

These people often ignore the other story — what happens if you borrow to invest and the asset loses value, and you are forced to sell at a loss. You may not only lose your deposit, but owe the lender, with nothing to show for it. Grim.

The second story is, of course, less common. But we don't have to look far to see how a totally unforeseen scenario can turn investment fortunes. And the more you borrow to invest, the higher your risk.

Having said that, if anyone is in a strong position to borrow to invest, it's you two.

Let's say you borrowed to buy another rental property, and you had to put in money to cover the mortgage and other costs. Then you lost your job, right when house prices had fallen.

That's when things can turn ugly. But not for you. You have income from other rentals and plenty of savings, so there would be no need for a forced sale.

The question, then, is whether you want to own another property. Rentals can be a hassle. Also, research shows that many people find adding to their wealth, beyond a certain level, can make them less happy.

Then again, you could build your savings further so that you could make significant contributions to a charity — which probably would make you happier. Your call.

A couple of parting comments:

• Try not to resent paying tax. Think of everything you get back for your money, as well as how taxes help others less fortunate.
• There's nothing wrong with a savings habit. Use it to build up still more for that charity!

Escape the debt trap

Q: I've paid off my mortgage but I'm struggling to pay off sundry debts for appliances (Gem Finance $5000, Farmers Finance card $1200 and Vodafone — daughter's iPhone — $1000). I'm still working and receive NZ Super. My net income is $43,000 a year.

How do I adopt a way of living, a philosophy of life, that motivates me to get rid of debt, live frugally and save? I can't afford to retire.

Difficulty: my wife doesn't want to combine her income towards this goal for both of us.

A: You're in the opposite situation of the couple above.

That reader is considering borrowing to invest in something likely to grow in value. For you, though, it'll be things that lose value. Running up debt for that stuff — with its usually exorbitant interest rates — is probably the biggest destroyer of wealth around.

But, hey, you've made a really important first step: acknowledging that the debt is a problem and looking for ways to kill it off. We'll call that Step 1. Tick it off.

• Step 2: Stop the spending. Just don't buy something unless you really have to. If the fridge dies, okay, replace it. But if the TV dies, read novels from the library until you've saved for a new TV. If it's something you want rather than need, think about whether past purchases really made you happier after the first month or so.

• Step 3: Tackle the debts one at a time. Some people say start with the smallest, so you make progress fast. I prefer starting with the one that charges the highest interest, as that is harming you the most. Choose whichever appeals to you.

• Step 4: Set up automatic fortnightly transfers, on the day after you get NZ Super payments, directly to the company you owe. If it won't accept small payments, use a separate bank account to accumulate larger payments.

Start by transferring $50 or $100 a fortnight — or whatever amount won't feel too burdensome. Then every month increase it by $10 or $20.

Those increases should be painless. But over a year $50 with $10 increases will grow to $160. Or $100 with $20 increases will grow to $320. And after two years you will be making big progress.

• Step 5: Reward yourself when you've paid off each debt. And with the big one, also when you halve it. No expensive rewards please! Perhaps some special chocolates. And write to me. I would like to hear how you're doing, and I'm sure other readers would too.

• Step 6: Build up a rainy-day fund for dying fridges and so on.

Any other tips from readers?

It's a pity your wife isn't "on the team". Maybe, as you make progress, you will gain her support. Perhaps show her this Q&A. It's going to feel so liberating when you're debt-free!

PS: Let's not go into how you get to be paying your daughter's phone bill. These things happen. But I do hope she understands that won't happen again.

Stuck in the hold queue

Q: I have been helping my 18-year-old daughter, recently returned from an aborted overseas trip, to apply for a job-seeker's benefit. The online form and MSD's communication are somewhat disappointing.

They ask many questions as if they have a yes/no answer, but many don't. They don't allow users to add any explanation. To progress, one must answer with half-truths.

One box on interest income wouldn't even accept an amount over $999.99. That's not much when my daughter has generous grandparents helping her save for education.

But the real annoyance was that, if you rang MSD, you were put on hold for an hour. It is very difficult to communicate with.

Yes, it has a big job to do, but with some effort it could make itself seem more human.

A: "We're sorry to hear this client had difficulty using our online forms," says Kay Read, group general manager of client service delivery at the Ministry of Social Development.

"To our knowledge, none of the fields in the online application limit the response to $999.99. However we will test this further."

She adds that MSD has about 1000 customer service representatives nationwide who take calls for Work and Income, Study Link, Seniors and Housing contact centres. They regularly answer more than 20,000 calls a day and are available six days a week.

"The best time to contact us is usually early in the morning — we are open from 7am Monday to Friday and from 8am on Saturday." That's useful to know.

"Our contact centres also have a call-back service. When it's your turn, the system calls you back and puts you back into the front of the queue." Another useful tip to try.

Read says your daughter can provide basic data through the online application form, and then a case manager assesses her information and will contact her.

She confirms your comment about having a big job to do. "We've met a high demand in recent months, having granted 45,000 applications for benefits since March 2020.

She adds, "We take our responsibility to support our clients seriously and will continue to work on improvements to our services as we respond to the growing needs we face at this time."

One more thing might help. If you go online to check.msd.govt.nz, you can get an idea of what you might get from MSD. It doesn't keep your data.

Overseas pensions

Q: Following on from the question last week regarding overseas pensions, although some positive changes are in motion, revisions to the Social Security Act still have a long way to go to eliminate discriminatory policies.

The act continues to fail to recognise that contributory pension payments deducted by an employer from an individual's wages and placed in an independent pension fund are not in any way an "overseas government pension plan", as in the case of Canada's CPP fund.

CPP contributions are a compulsory contribution from wages, required by the Canadian Government, so it is no different from KiwiSaver, except one is compulsory and the other voluntary.

To argue that CPP is a government-funded pension plan and therefore should be deducted from NZ Super is just not correct.

Canada's equivalent to NZ Super is its OAS (Old Age Security), available to all Canadians at 65. CPP is quite different in that it is funded by individuals' wage contributions up to age 60.

A: Let's start with the basics. The law (sections 187 to 189 of the Social Security Act 2018) says New Zealand Super must be reduced by the amount of any overseas pension if the overseas pension:

• "forms part of a programme that pays benefits or pensions for any of the contingencies for which New Zealand benefits or pensions would be paid (for example, old age, disability)
• And it "is administered by or on behalf of the overseas government paying the pension."

The idea is that someone who has lived overseas, and is eligible for a pension from that country similar to NZ Super, shouldn't get more from the two government pensions than someone who has lived here their whole lives.

We've debated the fairness of this before in this column, so let's not start again. I'll just say that I'm affected by it, but I think it's fair.

The difficulty is that every country's state pension system is a bit different. So it can be tricky deciding which pensions are roughly equivalent to NZ Super. And for a long time people have argued that the CPP is more like KiwiSaver than NZ Super.

However, George van Ooyen, group general manager of client service support at the Ministry of Social Development, says the CPP ticks both boxes above. "As CPP pensions meet the two criteria specified by the act, New Zealand benefits and pensions must be reduced by the amount of any such pensions."

He adds that CPP and KiwiSaver differ because CPP is compulsory, as you note. "KiwiSaver, in contrast, is not a public pension programme but is a voluntary, work-based savings initiative to help people with their long-term saving for retirement.

"The KiwiSaver scheme is not administered by or on behalf of the New Zealand Government but by private providers."

Van Ooyen continues, "Canadians are able to voluntarily supplement their public pensions through registered retirement savings plans (RRSPs). The Government of Canada provides tax assistance on savings in RRSPs, which encourages and helps Canadians to save for retirement.

"RRSPs are the Canadian equivalent of KiwiSaver and are not deductible (from NZ Super) as they are administered by private providers rather than by or on behalf of the Canadian Government."

That last bit, about the RRSPs, clinches it for me. There has to be a cutoff somewhere, and it seems to be drawn as fairly as it can be.

- 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 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. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.