Mary Holm: Tune in, bone up and save right

Q. I worked out the miracle of compound interest by biking a few kilometres every day to work and putting the equivalent of half the government mileage allowance in the bank. My wife and I have saved over $20,000 in a working lifetime, after tax!

I am a 60-something scientist who was brought up being told that to have anything to do with money was repulsive, which I believed, ran off to start communes in the 1970s and all the rest of it. It wasn't until I read works by that "terrible chap" Friedrich Hayek who explained the West's ambivalent attitude to money that I realised what was going on.

I think this idea that money and knowledge of it is somehow dirty has a great deal to do with the financial illiteracy in New Zealand (apart from plain laziness), even among those who have money and are educated. It might also be something to do with "Jack's as good as his master", and the penchant for houses, something to do with the New Zealand theme of multiple quarter-acre paradises.

I could count on one hand the number of academics and professionals I have met through my work who would be interested in a half-pie intelligent discussion on money in general. They just don't want to know because, it seems, "knowing" marks one as "having", and therefore a bit suspicious.

A. I suspect that some of your suspicions are right.

The silly part is that financial knowledge can make you much less hungry for money or worried about it. You can make the most of what you have, and concentrate on other aspects of your life.

What's more, people with money to spare can - and sometimes do - use it to improve the lot of others. Wealth doesn't have to equate with filth.

Q. Do managers of managed funds have the authority/ability to change the asset allocation if the market changes?

For example, a lot of canny investors retreated to mainly cash late last year and avoided most of the losses that others who stayed in the market suffered.

Can the manager of a share fund, for example, do this if he thinks the market is about to bomb, or does he have to stay invested in line with the prospectus?

Also, of course, what do people like me who have made large losses in managed funds do now, sell or stick with it?

A. A fund manager does have to stay invested in line with the prospectus. But some prospectuses give more leeway than others - and some managers use that leeway more than others.

I suggest you look at a fund's investment statement - the shorter document aimed at ordinary investors. If it doesn't state clearly what the fund will invest in, and how much flexibility there is, give it a miss.

When looking at share funds, at one extreme are index funds, which invest in the shares in a market index. The holdings vary only slightly from the index, and are adjusted regularly to keep up with index changes. The managers hold a bit of cash - money that's not yet invested and so on - but not much.

Then we have actively managed funds whose managers buy and sell shares in the hopes of beating the market. Some active managers say their holdings will be largely shares, regardless of market changes. But others say they will move in and out of the market, sometimes holding largely cash if they think share prices are heading downwards.

In the past couple of years, managers in that last group who bailed out of shares before the downturn have, of course, topped the share fund performance lists - ironically because they didn't hold many shares.

It's important to realise, though, that no manager who tries to time market booms and busts will always get it right. When they succeed, they can make a lot of noise about it. When they don't, all's quiet on the manager front.

The next test for the in-again out-again funds will be judging when to get back more fully into shares. The market can rise quite suddenly, and some managers will be left on the sidelines - with far lower returns than funds that have stuck with shares throughout the downturn.

Every would-be share fund investor has to decide which style of management they want.

Personally, I go for index funds. They don't claim to beat the market. But recent research in the United States and Australia confirms earlier findings - that more often than not they end up doing better than active funds over the long term. Their superior performance is especially true after fees, which are lower for index funds because they are easier to manage and trade less.

You are apparently in either an index fund or an active fund that stays largely invested in shares. If you would prefer an active fund that moves in and out of the market - in the hope that the managers will be unusually good market timers - by all means move to such a fund at some stage. But not yet.

While shares have risen considerably in recent months, if you move now you'll still be turning paper losses into real losses - assuming you invested before the financial crisis. Better to wait until the sharemarket rises further and the in-again out-again managers hold mostly shares.

At that point, the assets held by all the share funds will be more alike, and you can move from one fund to another without loss.

Q. My husband is a teacher and is in the Government's SSRSS super scheme. He is with ASB Bank. His contribution is 3 per cent, as is his employer's - the Government.

My question: Can he also join KiwiSaver to take advantage of the tax credits. And the big question: would he also get the 2 per cent employer contribution?

A. Yes he can join KiwiSaver - as can any other New Zealand resident under 65 who is in another super scheme. If he does, he'll get the $1000 kick-start and the member tax credits, but he won't get the 2 per cent employer contribution if his employer is already putting 3 per cent into the SSRSS. This is to prevent "double-dipping", and it seems fair to me.

The more interesting question is whether your husband should join KiwiSaver. The answer is "yes" - in one way or another. And, by the way, the same might be said for people in other super schemes, who may want to analyse their situation in a similar way to what follows.

First, let's note some key points:

* In some circumstances, SSRSS members can get their money out between 50 and NZ Super age, whereas in KiwiSaver it's NZ Super age - or older if you join when you are over 60. If this is important to you, it may sway your decisions.
* SSRSS members can stop and start their regular payments into the scheme whenever they want to.
* In the first year in KiwiSaver, employees must contribute at least 2 per cent of their pay. But after that they can take a contributions holiday and contribute nothing, or any amount they choose, paying it directly to their provider.
* When not on a contributions holiday, employees must put in 2, 4 or 8 per cent of their pay via their employer. But they can also make extra contributions of any amount - regularly or occasionally - directly to their provider.
* The last two points assume the provider will accept the amounts contributed. Most are pretty flexible. If your provider won't accept the level of contributions you want to make, move to one who will.

If your husband is willing to save more than his current 3 per cent to his retirement savings, the best strategy is to continue contributing 3 per cent to the SSRSS and to also join KiwiSaver, paying the minimum 2 per cent of pay for a year. If 2 per cent is less than $1043 - which will be the case if he earns less than $52,150 a year - he should top up his KiwiSaver contribution to $1043 if he can afford it, to get the maximum tax credit.

After a year he should take a contributions holiday from KiwiSaver but keep contributing $1043 a year directly to his provider and 3 per cent to SSRSS. That maximises the contributions he can receive from the Government, which will powerfully boost his savings. It also gives good flexibility on when he can withdraw money.

The financial rewards for using this strategy - especially in the first year when your hubby will get the kick-start - are such that it's worth eating into other savings, or adding to your mortgage, to make it work. This is probably also true of later years.

Nevertheless, your husband might prefer to stick to contributing just 3 per cent of his pay. The question then is: should he suspend SSRSS payments and put the money into KiwiSaver?

In the first year, KiwiSaver is clearly better. He receives the $1000 kick-start as well as the tax credit, which matches his contributions up to $1043 a year. This more than makes up for the fact that his employer will contribute only 2 per cent of pay to KiwiSaver, compared with 3 per cent to the SSRSS.

The SSRSS would be better only if he earns more than $204,300 a year - and I don't think we're paying teachers quite that much.

In later years, he won't get the kick-start. So he needs to weigh up getting the KiwiSaver tax credit versus getting the extra 1 per cent from his employer. Unless he earns more than $104,300 a year, the KiwiSaver tax credit will be higher, so he should stick with KiwiSaver.

If he does earn more than $104,300, he should take a contributions holiday from KiwiSaver and resume his regular contributions to the SSRSS.

For more on the rules regarding KiwiSaver for SSRSS members, and a comparison of the two schemes, see www.superscheme.govt.nz/SSRSSAndKiwiSaver/

A couple of final points:

* SSRSS members who earn more than $204,300 a year might want to note that even though the SSRSS works better for you than KiwiSaver in the first year, in the long run it's still worth also joining KiwiSaver to get the tax credits over the years.
* Any other readers who think the SSRSS/KiwiSaver combination looks attractive - and it certainly is - should note that the SSRSS is no longer open to new members.

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. 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.