Start saving young, and your older self will thank you. Photo / Getty Images
COMMENT:
Q: I don't understand how you got your figures for the Q&A last week on why the self-employed should use KiwiSaver.
I understand that the $521 annual government contribution is worth it. But if that's the maximum from the government for self-employed, how could they end up with $150,000 from their $100,000 of contributions?
Wouldn't it take almost 100 years contributing to get that $50,000 from the government at $521 a year? And who's going to work for that long? Or am I missing something here?
A: Yes, you're missing something very important.
But first, I admit that my example last week was a poor one. I said that if a self-employed person, or any other non-employee, contributes about $87 a month — or $1042 a year — they will get the maximum government contribution of $521. And that means that their savings are multiplied by 1.5.
So far, so good. But I added, "If you would have retired with $100,000 outside KiwiSaver, you will instead have $150,000." More typically, it would be half those numbers — $50,000 and $75,000.
Still, it's possible for someone contributing $1042 a year to have more than $150,000 in KiwiSaver at 65. It works if they contribute from 18 to 65, which is 47 years, and earn returns averaging 3 per cent a year after fees and tax.
It also works for someone starting at 28 and contributing for 37 years into a higher-risk fund with returns averaging 5 per cent a year.
How come? It's all thanks to compounding returns over long periods.
Compounding happens whenever you reinvest your returns. Let's say you contribute $100 at the start of each year and earn 5 per cent on it.
At the end of the first year you have $105.
After the second year you have $215.25 — last year's $105, plus $100 of new contributions, plus returns of $10.25.
After the third year it's $331.01 — last year's $215.25, plus $100, plus returns of $15.76.
After the fourth year it's $452.56 — last year's $331.01, plus $100, plus returns of $21.55.
After the fifth year it's $580.19 — last year's $452.56, plus $100, plus returns of $27.63.
After the sixth year it's $714.20 — last year's $580.19, plus $100, plus returns of $34.01.
Enough! The key point is that each year's total grows by more than the previous year's total. The growth gets bigger and bigger and bigger. And when that goes on for 37 or 47 years, the effect is powerful:
• In our 47-year scenario, more than half the retirement total will come from compounding.
• In the 37-year scenario, close to two-thirds will be from compounding — because of the higher return. (See graph).
What's more, many people sometimes contribute extra to their KiwiSaver account, boosting the compounding growth even further.
Note that this applies to anyone aged 18 to 65 who is not an employee, including caregivers and beneficiaries.
For employees, it's better still. If you earn less than $60,000 a year, government and employer contributions more than double your contributions, so your savings grow even faster.
It's not quite as good for those on higher incomes, because of the $521 cap on government contributions. But still, the contributions of an employee earning $200,000 are multiplied by 1.76.
The moral of the story: in KiwiSaver or any other investment, if you start early and continue for many years you will benefit hugely from compounding.
Q: In last week's Homes section in the Herald, there was an article on offset mortgages.
The writer detailed how parents can help their children with saving interest on their mortgage, by letting the balance in the parents' bank account be offset against the child's mortgage.
What he did not detail was any risk that might be incurred to the bank of mum and dad if the child defaults on their mortgage payments. Could parents become liable for mortgage payments?
A: To clarify for others, with an offset mortgage the balances in your other bank accounts are subtracted from your mortgage balance, so you pay interest on a lower amount. And you can also include the bank accounts of other family members.
The downside is that all those accounts receive no interest — although these days that's not much of a sacrifice.
Last week's article noted that if parents help their adult children in this way, the parents' account is still in their name and only they can access it, or pull out of the arrangement whenever they want to.
But you raise an interesting question about whether a mortgage default would affect the parents. All three major banks that offer these loans — BNZ, Kiwibank and Westpac — say no.
The only risk to the parents is if they are either joint borrowers or guarantors on the mortgage. "As one of many forms of parental assistance this is definitely a low risk option," says a Kiwibank spokesperson.
Q: I have enjoyed the last two columns regarding single mums saving to buy a house.
I am in my mid 40s, single and I have wondered if it is too late to buy a house. These last two posts have given me hope to keep saving. I would love to hear how other single women on an average wage managed to save for a house.
A: Let's hear from others on lower pay — and not just single women — who have come up with unusual ways to get that deposit together.
Q: Bonus Bonds holders are now faced with the tricky question as to whether they redeem their bonds prior to the winding-up, or have their funds drip-fed to them during the winding-up process. The possible advantage of the latter is sharing in any unexpended reserves when winding-up is complete.
ANZ's disclosure statement on 25 August gives no assistance as to likely costs during the winding-up, or even the current amount of reserves. The fund's balance sheet on 31 March, 2019 shows reserves of $56.3 million against bonds on issue of $3,233m. That is, reserves of $0.0177 per bond.
If 10 per cent of existing bonds are still in place at the end of winding up, and reserves remain the same, bondholders could get a final bonus of about $0.20 per unit. However, if 20 per cent of bonds remain against reserves of only $10m then their bonus would be about $0.017, after having waited 12 months or more.
My guess: get your bonds out before winding-up starts and have some fun or reinvest. Those reserves are likely to evaporate once the costs kick in. Good luck.
A: Last week's correspondent had only about $500 in Bonus Bonds, and I suggested she wait for the wind-up as a final "gamble". But people with large amounts invested need to take the decision more seriously.
You hold a senior role in the financial world and your opinion is worth listening to. So I asked ANZ for comments on what you say.
Unfortunately, their reply doesn't give us much help on how much the likely payout will be — basically repeating what's been said before.
"The amount returned to bondholders who remain in the scheme at wind-up will depend on how much remains in the scheme's reserves — which is the difference between the market value of the fund (the net assets of the scheme) and the bonds on issue — when the scheme is wound up. The reserves stood at more than $100 million when the decision to wind up the scheme was made on 26 August," says a spokesperson.
"Expenses, the number of bondholders remaining in the scheme when the wind-up process starts and the actual price we realise for the scheme's assets will all influence the level of reserves, which will be distributed to remaining bondholders. The ANZIS board believes reserves are sufficient that bondholders can be confident they will receive back their initial investment."
He adds, "The Board has agreed to reduce the management fee to 0 per cent from 1 September, so ANZIS does not get any financial benefit from delaying payments to investors."
If other readers want to take our correspondent's advice, and take the money and run, they should get on with redeeming their bonds. ANZ has said it will start the wind-up no later than October 31, but it may start earlier, "if demand for redemptions exceeds the cash available to repay redemptions."
Q: After much rummaging through the garage I have at last found proof I have Bonus Bonds. Unfortunately not the bonds themselves, but an old PO Savings Bank Bondholder card.
I suspect there will only be a few dollars waiting for me. My details are slightly out of date, and will need updating.
I know my mother, now deceased, also had Bonus Bonds in her lifetime. Whether she still had them when she died I have no idea. How do I go about finding this out, as I'm sure ANZ is not going to tell me if I ask? And if she does have bonds how can I claim them?
As more than half the people holding bonds are over 65, myself included, I feel there must be a huge sum in it from people who are now deceased. It seems a little unfair that Treasury will end up getting it.
A: That's a rather cynical comment about what ANZ will tell you. You're going to have to trust them, as I doubt if anybody else will have that info.
Here's what a bank spokesperson says: "If a wind-up is initiated we are required to write to customers within 14 days of the decision. We keep a register of all customers with Bonus Bonds.
"However, if customers haven't bought or sold bonds recently or let us know about changes to their details this information may not be up to date, so customers may not receive a letter." So it's up to you to get your latest information to the bank.
What advice does the bank give for people struggling to find proof of their Bonus Bonds holdings?
"To help us locate their Bonus Bonds, we'd ask customers to locate any documents relating to their Bonus Bonds, for example, a Bonus Bonds Certificate or a bondholder card," says the spokesperson.
"If they don't have those, they should provide information that might be useful, such as old residential addresses or previous names they might have used (such as a maiden name). The more information the customer can provide, the easier and faster it will be for us locate the bondholding (if any)."
And what about people like you, who think a deceased relative may have had unredeemed Bonus Bonds?
"We ask customers to provide us with as much detail as possible on any deceased estate to help us return the funds to the rightful owner. This could include a copy of the death certificate and in some cases a will.
"We have a deceased estates process to manage these, but the exact steps required will vary depending on the complexity of the estate and the size of the investment." He adds, "Please note that there is no need to do anything immediately. It will be some time before any funds are transferred to Treasury as unclaimed monies, and if a wind-up is initiated there will still be an opportunity for family members to get in touch with us."
On your comment about unclaimed money going to Treasury, he says, "The Trusts Act 2019 requires us to forward unclaimed monies to Treasury via The Supervisor.
The money joins unclaimed money from all sort of other sources, including trusts, superannuation, government bonds and even unclaimed property left at hotels, motels and other lodgings. People can get it back by making a claim. I'm not sure what other arrangement would be fairer.
- 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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