Mary Holm: NZ Super won't buy the high life

NZ Super is not going to buy many meals out, movies etc - the stuff of an enjoyable retirement. Photo / Getty Images

A correspondent in your column last week says there is no incentive to save. I can give them one: try living on NZ Superannuation.

I am retired and am grateful that I persisted in saving through both good times and bad - the latter when my investment portfolio went backwards, as it will inevitably do again some time. As you, and others, have said: don't be ultra-cautious, but diversify.

Currently, a single person living alone gets NZ Super of $668 a fortnight after tax, and a couple gets $1022.

While many retired New Zealanders say they get by on that, with perhaps a little extra from modest savings, it's not going to buy many meals out, movies, plays, concerts, trips, books - the stuff of an enjoyable retirement.

And yes, investing over long periods in riskier assets such as diversified shares or property - and sticking with the investments through thick and thin - is usually the best way to accumulate retirement savings. We need to emphasise "over long periods" though.

Savings Working Group

In your last column, you outlined increased GST and decreased tax on saving, and other proposals of the Savings Working Group (SWG).

Your answers to questions are invariably moderate, and I am comforted that you were a member of the group.

However, while I am retired and personally still fortunately a saver, I take issue with this proposal.

My reasons lie primarily within the closing statement by the SWG chairman Kerry McDonald, that the majority of New Zealanders are not in a position to save, and the broad brush approach of our GST application.

Implicit in his statement is the assumption that it's not that New Zealanders fritter their discretionary income away on non-necessities, but that after paying for the necessities they have no money left.

Yes, as with the recent GST increase, the Government may make the change neutral at the time of implementation. But inflation quickly erodes this, particularly of late in the cost of basic foodstuffs, and that looks likely to continue for the short to medium term at least.

The minority in the fortunate position of being able to save are able to offset increases by the returns they earn on their investments/savings. And so this structural tax change yet again favours the more fortunate at the expense of the less, and exacerbates the income gap between "rich and poor", a race in which New Zealand is well up in the field.

I also note that these and similar proposals are invariably made by people in the saver category, of which such working groups are composed.

I suppose you're right - everyone in the SWG probably has some savings. But I don't think including non-savers would have made much difference. We weren't about "looking after the rich guys".

The SWG doesn't expect lower-income New Zealanders to suddenly start saving big chunks of their incomes, and therefore make a speedy and dramatic difference to total national savings.

I worry, though, that people have latched on to that, and decided not to even try to save. As today's first Q&A points out, they'll be the losers.

Everyone could save a dollar a day if they really wanted to. I suggest getting into the habit in a small way, and boosting your savings when times get easier. Hardly anyone stays in the lowest income bracket through their whole lives.

While increasing GST and lowering income tax - perhaps particularly on earnings on savings - might not greatly help the strugglers in the short term, it should encourage everyone to gradually make the switch from spending to saving. Rather than condescendingly saying, "there, there" to people on low incomes, the SWG says: "Hey, this country can do better, and you can be part of that."

As for making the tax change in a neutral way, there seems to be lots of misunderstanding around that.

Last October, the GST rise pushed up prices. But - despite comments like the one this week from Derek Fox on Radio New Zealand - it wasn't just those with jobs who were compensated, via income tax cuts.

Compensation also included increases in all main benefits, student allowances, NZ Super and other pension payments, and Working for Families. Almost everyone was said to be better off - the average family by about $25 a week.

Unfortunately, at around the same time, food and transport prices happened to increase a lot for the usual reasons - to do with supply and demand. But the GST rise got the blame.

That doesn't mean, though, that if the same thing were to happen again, inflation would erode away the compensation - as you suggest. Although in the short term pay rises have lagged behind price rises, that's because of the economic downturn. It's not usual.

Over the past five and 10 years, for instance, wages have risen considerably faster than prices, according to the interesting CPI inflation calculator on www.rbnz.govt.nz.

Where is all this taking us? I agree that an increase in GST - even with similar compensation to last year's increase - probably won't do much to reduce the gap between rich and poor. And I don't like that gap any more than you do.

But that shouldn't be our only - or even our main - goal. If the SWG's proposals are adopted, we expect the whole New Zealand economy will be much stronger, lifting everyone's wealth and increasing people's opportunities and incentives to get their fair share.

Count your blessings

In your last column, you had a letter from one person with $1.4 million in cash or cash equivalent and another with a freehold house plus $250,000, and both of them were moaning like crazy with their worries of how they can't get the balance of risk and return on their money they want.

Well, fair enough to be looking for ways to get a good return on your investment, but to go on like some cry-baby when you are so much better set up than the average person really sticks in my craw. Sure, I can see that these people have earned what they've got, but my first advice to either of them would be to be grateful and not let your worries ruin your enjoyment of life.

I've got a mortgage worth about $150,000 on a $600,000 house, but my KiwiSaver is up to about $17,000. My wife has just started so she's only got about $1500. We're looking to get that mortgage cut out in about eight years or so, thanks to some very frugal living. But I am profoundly appreciative that I have what I have when things could be a whole lot worse.

The first correspondent last week seemed more scared than moaning, to me. And the second seemed more frustrated.

Still, you have a point. A little counting of blessings wouldn't hurt.

Mortgage struggle

In reading your recent advice to the couple struggling to pay their mortgage, I must assume you have asked about the duration of the mortgage? You mention a longer term in passing as an option, but in my view it is the first thing to consider.

Selling a home involves a lot of costs, and likely some cash loss on a 100 per cent financed home. It might well be better to extend their mortgage by five or 10 years to avoid the resale costs, continue savings via principal repayments and allow a modest spend up. Especially as it sounds as if they wish to continue living in the same area.

I agree that selling and buying again later is costly, so your idea has merit.

Much depends on how long their current mortgage runs for. If it's 15 or 20 years, there's wriggle room to do what you suggest.

For example, on a $300,000 15-year mortgage at 6.5 per cent, monthly payments are $2613. If it were a 20-year mortgage, payments would drop to $2237. At 25 years, they would be $2026, and at 30 years, $1896.

Switching from a 15-year to 30-year loan, they would have $717 more to spend each month.

But there's a big "but". If you extend a mortgage, the total interest over the life of the loan zooms up. In our example, if you changed from 15 to 30 years, total interest would more than double from about $170,000 to $383,000. That's a couple of hundred thousand dollars less to spend in retirement.

It's important to switch back to a shorter term as soon as possible.

Tax-driven traps

I am a self-employed tax consultant and I agree whole-heartedly with your recent remarks about the person who received a telephone call offering a way of reducing his or her tax bill by up to $8000. If your correspondent was interested in saving tax he or she should seek professional advice.

Based on what your correspondent said I believe that the suggested savings would be achieved by way of a leveraged property investment, probably similar to those previously marketed by the likes of Blue Chip.

One of the things I have learned over my 25-plus years in practice is that tax affects investment decisions in sometimes irrational ways. Investors frequently make decisions on tax grounds, rather than investment grounds. All too often the risks are underestimated and the return expectations inflated with often disastrous results.

I would also add that the removal of depreciation on buildings, together with a general tightening of the rules around depreciation on fixtures and fittings announced in last year's Budget, make it harder to achieve the tax savings suggested without taking on a potentially excessive level of debt. I would therefore caution everybody about getting involved in any scheme promoted over the phone.

As your colleague Brent Sheather said recently, the returns from listed property investments are far superior to residential property, yet many prefer to invest in residential property. The ability to leverage the investment and write off the expenses against other taxable income is undoubtedly a big factor in that choice.

Well put. Another reason to avoid tax-driven choices is that the Government can easily change the rules - as the depreciation changes show.

A quick note about leverage - a.k.a. gearing - which is borrowing to invest in something. While you gain more if the investment does well, you lose more if it does badly. In other words, it boosts the risk.

Speaking of investments promoted by phone, I once asked to hear from any reader of this column who had invested in something they heard about by phone that ended up being a good investment. Nobody replied.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her 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 Money Column, Business Herald, PO Box 32, Auckland. 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.