If you're going through tough times at the moment, do spend just a little on treats for yourself. Photo / 123RF
COMMENT:
I am a 50-year-old professional fulltime worker and have recently separated from my husband.
I'm currently renting. We share care for our two children equally.
After legal expenses and buying necessities (a car) I will have about $70,000 left over.
I had planned to keep a couple of thousand aside for emergencies, and invest the rest in a term deposit for a year while I continue to rent and settle into my new life.
After a year, I plan to use the money for a mortgage deposit for a small home (I don't live in any of the major cities).
I have about $70,000 in KiwiSaver. Do you think the use of my marriage settlement money is sound?
It looks good to me. I like the idea of taking a year out, which will give you time to think about where you want to live, what type of property and so on. And in the meantime, a bank term deposit is best for short-term money parking.
There's another point you might not have realised. Even though I assume you've owned property before, when it comes time to look into buying your home, you may be able to:
• Withdraw your KiwiSaver money to add to your deposit.
• Receive a HomeStart grant of up to $5000 towards your home — or $10,000 if you buy a brand new home. That's a gift from the Government that you might as well get if you can.
Many people don't know about the KiwiSaver help for previous home owners who are "in the same financial position as a first home buyer".
It gives a fresh start to people who have been through a relationship break-up, a business failure or similar.
To qualify for the withdrawal or the grant, you must have been in KiwiSaver for at least three years, you can't currently own property, and you can't have used KiwiSaver first-home help before.
The financial test is that "you do not have realisable assets totalling more than 20 per cent of the house price cap for an existing/older property in the area that you are looking to buy in".
Realisable assets include money in the bank or investments (excluding KiwiSaver), a boat, caravan or second vehicle. And the 20 per cent maximum amounts to $80,000 to $120,000, depending on where you are buying.
To get the grant, but not the withdrawal, there's also an income cap of $85,000 a year, and a house price cap of $400,000 to $650,000, depending on where you live and whether the house is new or not.
Your KiwiSaver contributions have to be above a minimum level, and you have to have a deposit of at least 10 per cent, including withdrawn KiwiSaver money and the grant.
For details see tinyurl.com/PreviousHome.
Of course, if your $70,000 bank deposit is enough to buy a home without withdrawing from KiwiSaver, you may wonder whether you should leave your savings in the scheme.
But it's probably better to reduce your mortgage using the KiwiSaver money, with the goal of being mortgage-free or close to it by the time you retire.
In the meantime, after buying your home, you can build up your KiwiSaver balance again.
One final point: You're going through tough times at the moment. Do spend just a little on treats for yourself.
Life for me, financially, is easy. As a 70-year-old, I collect NZ Super and have two debt-free properties, one being my home and the other netting about $25,000 a year. Total worth is about $1.3 million.
In addition, I have about $400,000 in cash. I enjoy overseas travel but because of health issues that is unlikely to continue beyond, say, the next three to five years.
I am considering helping a family member, one of my two beneficiaries, buy a needed bigger and better home. An amount of $200,000 to $300,000 would do the trick. I don't want to dig into my nest egg so was wondering about a reverse mortgage on one of the properties.
Simply, I see this as a way of gifting the money now rather than when I die. Your thoughts, please.
Sorry, but I'm not keen on the idea.
Generally, it's not wise to run up debt when you've got cash or assets you could sell instead.
In your case, you could use some of your $400,000 cash or sell your rental property. I know you don't want to dig into the cash, and I'm assuming you'd rather keep the property, but let me try to convince you otherwise.
The main provider of reverse mortgages these days is Heartland Bank, which charges 7.82 per cent interest. If you borrow from it, you have a debt growing at that rate.
The only way you would be better off keeping your cash and your property is if those assets are growing at a faster rate than the debt.
That means getting returns on the cash and property of more than 7.82 per cent a year — after tax and all expenses.
There's no way that's happening with your cash, unless it's invested in something horribly risky.
The property? Who knows? Let's say it's worth $500,000. Your $25,000 net profit a year would give you a 5 per cent return, and then we add any gains on the value each year, which you won't know until you sell.
It's certainly possible that the investment is growing by more than 7.82 per cent a year, but also possible it's losing value, depending on where in the country it is.
As I've said before, there are two reasons I suggest retired people consider selling their rentals. One is possible hassles with difficult tenants or maintenance problems. The other is that you can't spend the capital.
But some readers have replied that they enjoy looking after their rental properties, and if they don't need to spend the money tied up in them, why not keep them?
If that applies to you, we'll turn our attention to your $400,000 in cash. I appreciate that psychologically you want to keep the nest egg intact for your own spending, but if you do that while taking out a reverse mortgage, your total wealth will decrease quite fast.
According to the calculator on Heartland's website, if you borrow $250,000 at 70, by age 80 it will be $545,000, by 85 it will be $805,000 and by 90 it will be $1.2 million.
And that assumes interest stays at 7.82 per cent. If interest rates rise, the totals will be considerably more.
Of course, the values of your properties will also grow. If they grow by 3 per cent a year, by age 90 they will be worth $2.3m. But still, the reverse mortgage will make a big hole in the proceeds from selling the properties.
Your two beneficiaries will get considerably less than if you do the following:
• Take the $200,000 to $300,000 out of your $400,000 savings.
• Keep spending your savings as if you had $400,000. Why shouldn't you enjoy your retirement?
• When the money runs out, consider selling your rental. If you still really want to keep it, take out a reverse mortgage at that stage. The older you are, the less time the loan has to grow to a silly amount.
You've had a few Q&As recently about moving part of your KiwiSaver to a separate higher-risk fund. I am not sure if most providers have a similar option, but my provider enables a percentage split over various levels of risk.
I joined the scheme on day one in 2007. You can alter your weighting four times a year at no charge.
While doing so frequently is not, of course, advisable, I have over the years changed about four times, starting with 80 per cent growth and 20 per cent balanced, and gradually making the investment more conservative.
At age 64, I now have 30 per cent growth, 50 per cent balanced and 20 per cent conservative.
Many readers may still not realise such options are available — that is, effectively within one investment.
Gosh. You've clearly put a lot of thought into which risk level is right for you. But given that there's a certain amount of guesswork in all investment decisions — because we don't know what the future holds — I think it's better to keep things simpler.
Although some providers offer the sort of option you are using, practically all of them offer funds with various asset combinations.
Most have what are sometimes called defensive funds, which are really low risk. Then comes conservative funds, and then balanced — which are in the middle of the risk range.
At the higher-risk end are growth funds — with most of their investments in shares and sometimes also property. Some providers also offer aggressive funds, with pretty much all their money in shares and property.
Any reader who hasn't put much thought into which risk level is right for them should go to the "Find the right type of fund for you" tool on the KiwiSaver Fund Finder on sorted.org.nz.
You answer just three questions, which take into account:
• How soon you expect to spend the money. If it's within 10 years, you want somewhat lower risk, and if it's within a couple of years, you want even lower risk.
• Your tolerance for market ups and downs. If you would freak out if your balance falls, you need lower risk, although you should realise that will mean lower average returns over the long term.
The tool takes all that into account and recommends a risk level for you.
You're absolutely right that changing your risk level frequently is, to put it bluntly, dumb.
It was shocking to read in the Financial Markets Authority's 2018 KiwiSaver Report that about 500 people had made four fund switches during the year, and another 460 had made five or more switches.
That suggests some people are trying to guess where the markets will move next — a fruitless endeavour.
Earlier this year I wrote about a KiwiSaver member who moved each month to the fund that had performed best in the previous month. His return for the year was minus 5 per cent. If he had stayed in his original fund it would have been 9.2 per cent. The only good reasons for switching to a KiwiSaver fund with a lower or higher risk are:
• You're getting closer to the time you expect to spend the money, which I assume is behind our correspondent's switches.
• You realise you can't cope with your balance going up and down with the markets. If that's the case, move to lower risk. But stay there.
• You realise you should take on more risk to make the most of higher long-term returns, and you know you will take market ups and downs in your stride.
- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. 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 or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. 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.
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