Mary Holm: Plenty left in kids' piggy bank

My partner and I joined our 10-year-old daughters to KiwiSaver some 18 months ago. Since then we've left their accounts well alone, which seemed to be your advice, as without the tax credit that adults get it was better to pay off our mortgage sooner.

Now, though, with the National Government removing the $40 a year subsidy on fees, we're wondering what to do. Won't the annual fees slowly erode the asset, especially in times of negative growth?

Yes, they will. Over the long haul, though, there will probably be enough years of strong returns for your daughters' accounts to grow.

At worst, their $1000 kick-starts will decrease before they turn 18. But it's extremely unlikely they would end up lower than, say, $700 or $800. That's still $700 or $800 - and quite possibly much more - that the girls wouldn't otherwise have had.

What's more, being in KiwiSaver might get your daughters started on developing strong savings habits when they get their first part-time or full-time jobs. They might learn a bit about how markets work. And they'll be lined up to get KiwiSaver help with buying their first homes.

It's still a great idea to combine kids and KiwiSaver. And once they turn 18, and are eligible for tax credits, it's good to help them contribute up to $1043 a year so they receive those tax credits.

By the way, for those who complain that I cover KiwiSaver too much, it's been 11 weeks since the headline Q&A in this column was about the scheme. Defensive? Well, yes. Mindful of your criticisms, I might have erred too much the other way - given that there's barely a New Zealander under 65 who wouldn't benefit from being in KiwiSaver.


My wife and I are both in our early 40s. We are in the fortunate position of having just paid our mortgage off. We have two young children, the younger of whom will start school later this year, freeing up her daycare payments.

We both joined KiwiSaver from its inception and have approximately $40,000 invested in managed funds. This figure was around $60,000 but in recent times has dropped in value.

My question is: we are now ready to begin investing again. Having seen our managed funds drop dramatically in value we're a bit nervous about putting more money into that scheme.

I follow the housing market closely and see that house prices are gradually falling, coupled with low interest rates. The purchase of a rental property is looking more attractive.

Isn't it interesting that when house prices go down the housing market looks more attractive to you, but when managed fund investments go down, the opposite happens.

I suppose it's partly because your managed fund has dropped more than houses - although take another look, as many managed funds have recovered a fair bit in recent months.

But there's probably also an element of trust that the property market will recover - a trust that I suspect many New Zealanders don't feel for the share or bond markets, where most of your managed fund money is almost certainly invested.

This is a pity. The very fact that share and bond funds have fallen considerably in recent times suggests they might do better than average over the next five, 10 or 20 years. Our next correspondent certainly thinks so.

Still, if property has more appeal for you, I'm not going to say it's a bad idea. Unlike the couple thinking of buying a rental property who wrote to this column recently, you have a mortgage-free home. That makes a huge difference to your tolerance for risk.

So does the fact that you are relatively young. And, given that your child has been in daycare, I assume that you both work. That gives you a buffer, as it's highly unlikely you would both lose your jobs at once.

You need to be aware, in doing your sums about a would-be rental, that mortgage interest rates could rise, rents could fall and you might have periods without tenants - or have tenants who do expensive damage. It's also possible that house prices won't rise much for a long time.

But if you work through a worst case scenario and feel you could survive it - sticking with the property for perhaps 15 or 20 years if that's what it takes to make it a winner - then go for it.

You already have $40,000 in shares and/or bonds, so it's not as if you will be concentrating only in property.

I suggest you buy a place not too near your home, and a different type of property, so you get better diversification. And, in the current environment, bargain hard.

Thank you for your recent sound advice on an investment strategy for retirement funds. I am a 59-year-old Kiwi and am retired. Luckily I sold my house in Auckland in June 2007 and got top dollar just before the market turned.

I seriously considered investing part of the proceeds in a share fund but thankfully didn't. Having a low risk threshold, I put all my money - apart from living expenses for the next four years - on a term deposit with ASB earning 8.7 per cent a year, with four years to run.

I note your comments about keeping money for the next two years in cash, the following eight years in high quality bonds and the remainder in the sharemarket well diversified.

I can see good scope for a major recovery in the sharemarket over the next four years. So I'm wondering whether it would be best to keep all my money in my term investment until 2013 or take out the money I plan to spend in more than 10 years and put it in a well diversified share fund.

My bank has advised that I can withdraw a portion of my term deposit and suffer a 2 per cent drop in interest only on that amount, and leave the rest intact earning 8.7 per cent. What would you advise?

I'm not surprised that the bank is offering you a deal on breaking your term deposit. It would probably be happy to get out of paying 8.7 per cent in the current lower-interest-rate environment. But that's exactly why you might be best to leave your money where it is. You're getting what has turned out to be a pretty good return.

It's certainly possible that you could do better in a sharemarket rally, but it's also possible that shares could fall further.

Trying to predict what the market will do over the next few years is a fool's game.

And you, with your low risk threshold, might end up committing an investment "sin" - bailing out of the share fund after a downturn and so cementing in your losses.

Note, too, that to do better in the share fund, you need a return considerably higher than 8.7 per cent to make up for the 2 per cent cut in interest on the money because you took it out early.

Having said all that, I do think it's usually better to put 10-year-plus money in a low-fee diversified share fund. And the best way to get into such a fund is to drip-feed into it over time. That way, at least some of your money will go in at what turn out to be good prices.

If you really want to get into a share fund - and you'll promise yourself not to jump if times get tough - perhaps you could transfer a small portion now, and further small portions in one, two and three years. Work it out so that, by the time the term deposit has expired, you have maybe a third of your planned share fund total in the fund. Then transfer the rest into the fund over the following year or so.

With regard to the lady in your column last week whose husband is dying, she mentioned wanting to cover a child's private school fees for the next four years.

I'm not sure what type of private school her child goes to, but most private schools have a type of fee payment insurance policy (included in the fees). If the bill payer dies, the fees are taken care of for the rest of the child's time in the school. This should be investigated with the school.

I've never heard of that before. I suppose it's one of those things that you notice only when it affects you or someone you know well.

Anyway, thanks for writing. I'm sure our correspondent will check that out. It's a lovely way for a school to help out a family.

Very sad story in your column last week. You asked about insurance options for the woman whose husband has a terminal illness. I would suggest her insurance broker outlines insurances for trauma and total and permanent disability cover in addition to the other covers mentioned.

This provides a lump sum rather than a regular payment - which is what you get with loss of income insurance.

Remember if she is considering starting a new business there is no income history and it may be hard to get loss of income insurance.

I had thought you could get trauma and total and permanent disability insurance only as an add-on to life insurance. And, as I said last week, the woman might not need life insurance. But further research shows the two types of insurance are not always linked.

So yes, she might want to look into that cover, especially if she can't get loss of income cover.

I must say when I first became self-employed, the insurance companies weren't exactly lining up to offer it to me - although my insurance broker did find one company that would do it.

If the woman decides to start her own business it's certainly a good idea to have at least loss of income or trauma, etc, insurance, possibly both. And this is even more important while she has dependent children.

KiwiSaver basics

The KiwiSaver Basics page on www.maryholm.com includes the answers to many readers' questions about the scheme.

Mary Holm is a seminar presenter, part-time university lecturer 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.

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