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OPINION:
Q: Just a comment regarding people who love the whole "retire early" thing — as discussed in your column last week. I am the child of parents who retired at 40. It was one of the worst things they ever did.
You would have thought it would mean more time to focus on my siblings and me, but I'm guessing the lack of structure and routine from "work" actually meant they did the opposite.
Work has so much more meaning than earning a dollar. If you are going to stop work, volunteer or do something, because I think selfishness will inevitably creep in if you do nothing. Sure enough, nine years after retiring, my parents divorced after 30 years together.
All I want to encourage is that people don't just see it from the parents' view but also the children's view, if they have them.
Now, my husband and I could easily "retire". But my parents' journey has meant that first-hand experience tells me to take a different path.
A: I said last week that "work gives many people added purpose in life". But I didn't think about the children's viewpoint, so thanks for writing.
Of course yours is just one story. Some parents would probably do brilliantly, giving their children heaps of help and attention.
Then again, there's such a thing as too much parenting — especially if it's coming full-time from two non-working parents, and especially as the kids get older.
I'm no expert, but I reckon children benefit from seeing their parents fulfilled from some activity outside the family, whether it be work or volunteering for a charity or local organisation, doing something creative, learning a new skill or teaching a skill to others.
Can't argue with the importance of thinking about how your choices land with the kids.
Q: Thanks for your response to my letter about FIRE (financially independent, retire early) last week.
In 2010 my wife and I acknowledged that we managed a basic but happy life on my starting accountant's salary of $40,000, when she was still studying. So we saved her whole income once she got a job. And then we increased savings by at least half of every pay rise — after the first pay went on a big splurge.
But the biggest part of the "huge savings goal seeming impossibly high" thing is capital return.
No normal family could ever hope to save $1 million to $2m. But put away $30,000 per year and with historically reasonable 7 per cent returns you get to $1m in less than 18 years.
In our case, the 2012-16 property boom helped — a lot. It turned a $35,000 deposit on a cheap investment property into almost $500,000 of equity in five years.
A: It's useful to have your numbers, as some people commented that FIRE is only for high earners. Your $40,000 in 2010 is equivalent to about $54,000 now, according to the Reserve Bank's wage inflation calculator. That's hardly big money.
And you've saved cleverly — putting aside all your wife's pay and then a big portion of any pay rise.
You're right, of course, about the importance of getting high returns over long periods. To do that, you really have to invest in shares, a share fund and/or property — and stick with them through thick and thin.
A return of 7 per cent, after fees and tax, is probably too high to assume for the future. Share markets over the long term have averaged somewhat less than that. And your timing on your investment property was really lucky.
But the beauty is that, if returns turn out to be lower, you simply work a few more years.
Q: I was surprised that you had not introduced ETFs as an investment option for the 48-year-old woman in last week's paper.
ETFs are an alternative to managed funds at lower cost, given the fees charged by managed funds have been found (on average) to be a waste of money.
While the ETF industry here is small, Smartshares are backed by NZX and offer all the diversification a Kiwi investor may need. Or so I think.
A: I agree. Where we differ is that I include ETFs — or exchange traded funds — as managed funds.
My definition is any vehicle that pools many people's money, and the managers buy a wide range of investments. There are two main types of fund management:
• Active, where the managers buy and sell investments in the hope of performing better than the markets. They cost more to run and tend to charge higher fees which — I agree — don't necessarily bring in higher returns.
• Index or passive, where the managers buy the shares — or bonds, although it's usually shares — in a market index such as the NZX50. They trade the shares only when the index changes, and don't research what to buy and sell, so their fees are usually lower.
Then there's another distinction, between the usual non-traded funds and ETFs, which are traded on the stock exchange like shares, and are almost always passive. There are subtle differences between traded and non-traded, but overall I think they are equally good investments.
For decades I have recommended index or passive funds — including exchange-traded funds since they became available. And last week I did suggest the woman choose from the lower-fee funds, which are nearly all passive.
But I didn't go into ETFs, which you can access through the online share trading platforms, Hatch, InvestNow or Sharesies. That Q&A was too long already! But ETFs are indeed a good option, so thanks for pointing that out.
Q: I read with interest in your last column that when you apply for NZ Super, you have to sign a statutory declaration about the amount of time you lived overseas.
Does your superannuation decrease if you have worked overseas? In my case I worked overseas for eight years but did not pay into any superannuation scheme in the country I lived in. I also did an OE in my 20s for a couple of years.
Do I have to declare these, and will they affect my superannuation? I will be applying for Super soon and I'm nervous that I may not qualify for the full amount.
A: Relax. You are entitled to the full NZ Super as long as you have lived in New Zealand for at least 10 years since you turned 20 — including at least five years since age 50. There's a bill in Parliament that would raise the 10 years to 20 years, but that still wouldn't be a problem for you.
When you apply for NZ Super, you will have to declare when you lived overseas and where. You'll also have to give details of "any overseas pension you receive or are entitled to". But in your case that seems to be none.
Next week we'll look into the bill's possible effects on another reader.
Q: I really think you missed a golden opportunity last week to have a go at Southern Cross.
I have been a member of Southern Cross for over 40 years, and cover for my wife and me is now up to $580 monthly. Our plan has a $1000 excess and a minuscule discount for no claims.
With income from interest-earning investments at historically low levels and companies ceasing dividends on shares, disposable income has taken a big hit, with greater reliance on the pension. And the insurance is becoming unaffordable.
I concede that healthcare costs more as one gets older, with a greater likelihood to claim. But why isn't the insurance strongly aimed at people in their early thirties? By increasing the spread of members, costs to 80-year-olds like myself could be mitigated.
The young ones would have a competitive premium and even knowing that they were supporting the older members, surely this would be mitigated by the fact that they are going to be in that age group one day.
One of the key disadvantages with Southern Cross is that any tests such as MRI, electrocardiographs etc are not met unless an operation follows within six months. And the exclusions are double what is included. Peace of mind was never meant to be that expensive!
A: I'm not here to "have a go" at any person or company unless I think they deserve it!
I can't judge whether your insurance cover is worth what you pay for it. But the fact that Southern Cross is a not-for-profit company suggests it's not ripping you off.
And sorry, but I don't think your idea of enticing young people into the scheme so they can subsidise older members would work.
If their premiums more than covered the healthcare costs for their age group — so there would be spare money for you and your friends — then competing insurers would charge them less. And if all health insurers were forced to change their pricing in this way, most young people would probably just drop their insurance.
Telling the young that they would get a better deal when they are 80 wouldn't wash either. I, for one, would never operate on the assumption that an organisation would stick to a promise made 50 years earlier.
On tests not being covered unless you have an operation, that's a feature of my health insurance plan too. Try to get past the annoyance of having to pay for a test by celebrating the fact that you don't need an operation! After all, if all tests were covered, premiums would just be higher still.
Instead of getting cross with Southern Cross, maybe your energy should go into lobbying the Government to provide better free healthcare, which would make health insurance redundant. Or ... read on.
Q: My wife and I have been with Southern Cross Health Insurance for over 50 years. Our policy only covers surgical procedures and is rising to almost $10,000 a year from next month, an increase of $554. We feel ripped off, but as we age we are still on the winning side. The biggest ripoff is the GST on top.
Years ago ... insurance for life etc. was tax deductible. Would it not be a win/win situation if health cover was made GST or tax deductible — or both?
The tax revenue for government would hardly change, as most older policy holders paying higher premiums are not paying tax anyway. With many more moving to private cover, the savings in the health system would cover the lost GST. What do you think about this Mary?
A: It's an idea that is floated every now and then, and may have merit.
First, though, it's not true that most elderly people don't pay tax. NZ Super and most investment income is taxed.
Still, that makes it more likely that if there were tax breaks, people would get more health insurance, and therefore cost the government less for healthcare.
How it would all come out in the wash for the government is hard to say. The other question is whether it would make health insurance fairer. If premiums were tax deductible, that would help people with the highest taxable income the most, and make little difference for those on lower incomes.
However, removal of GST on premiums would help everyone equally. Perhaps it's time for a chat with your MP.
Q: Thanks for answering my questions last week about contributing to the KiwiSaver account of a relative overseas.
I hadn't thought about overseas workers not being entitled to the annual KiwiSaver government contribution as they are not paying New Zealand tax. But I agree absolutely that this is fair.
I've appreciated your past comments on tax equity and the fairness of everyone paying their taxes. An accountant I knew used to say to tax-complaining clients (laughingly) "if you think you're paying too much tax, earn more!"
A: Quite.
- 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.
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