When you have several children, being fair with financial gifts can be complex, especially when investing funds for a future date. Photo / Getty Images
OPINION:
Q: I am wanting to invest around $50,000 plus for each of our three children (20, 12, 10 years old).
KiwiSaver seems to be an option that might work well given that our 20-year-old may want to use it for a deposit on a house sometime in the next two to five years (already has $10,000 in KiwiSaver).
And for the younger ones, 10 years invested at say 7 per cent compounding interest would give them about $100,000 for a house deposit or a really good start to their retirement savings.
I am not sure if this is a good option. I need to ensure the funds are secured for them and also that they can’t touch it unless it’s for a house purchase. One concern is KiwiSaver policy may change, meaning the house deposit option may not work. Appreciate your thoughts.
A: Last thing first. There can be no guarantees about how a future government could change KiwiSaver. But I can’t imagine a government removing people’s right to withdraw money for a first home. There would be a huge outcry, and I bet they would lose the next election!
Generally, KiwiSaver will serve your purpose well. I recokon it’s as secure as any other investment except those guaranteed by the government. However, there are a couple of other issues to consider:
In light of that you might consider using a non-KiwiSaver fund, so each child can withdraw the money to make other investments or perhaps start a business.
One way to make things equal would be to make the gift to each child when they turn 21, with the younger ones’ amounts being adjusted for inflation. I’ll explain how to do that in a Q&A below.
If you want to invest the whole $150,000 or so now, you could put the money for the younger two into a non-KiwiSaver fund, and use that for their gifts at 21. Assuming the fund earns more than inflation, there should be some left over. When the last one is 21, you could divide that excess by three and give it to all of them then as a bonus.
By the way, your suggested 7 per cent return is probably overly optimistic. Read on.
Q: I want to suggest that your assumption of an 8 per cent average growth, after fees and taxes, over 65 years, on a KiwiSaver plan (or any investment) is not “quite possible” as you say in last week’s paper.
I’ve been investing in KiwiSaver and various other managed funds for decades, and they’ve performed poorly. Has there been any stretch of 65 years where an investment has averaged 8 per cent?
A: Fair cop! Last week we were talking about investments in KiwiSaver growth funds, which generally hold mainly shares and have higher returns than lower-risk funds. When financial providers and advisers make projections about performance in such funds, I’ve seen them use rates higher than 8 per cent. But that’s no excuse. I should have looked at the data. So now I have.
The authoritative source is Credit Suisse’s Global Investment Returns Yearbook, which is put together with the help of some top academics.
Their early 2022 yearbook says real returns on world shares since 1950 have averaged 7.2 per cent, but since 1990 it has been 5.2 per cent. And they expect future returns to be lower.
Note that these are after adjusting for inflation, so the “raw” numbers — the ones that we tend to use — would be higher. Note, too, that my first choice last week was to use 6 per cent. But still, I shouldn’t have then added the 8 per cent returns.
Footnote: It sounds as if your returns might have been worse than average — assuming you are investing in higher-risk funds. Check your funds in the Smart Investor tool on sorted.org.nz. Perhaps you are paying high fees, and might want to move to low-fee alternatives.
Q: It was interesting to read last week the calculations on estimated growth in value of the KiwiSaver kickstart. But I was wondering, to work out the real value of that kickstart now, wouldn’t you need to take inflation over that time into account?
On current inflation rates I would think that would make quite a difference over a 15-year time span. Are you able to do a calculation with inflation rate included?
A: You make another good point about last week’s numbers. Inflation has been pretty low over the last 15 years, until recently. But still, it makes a difference over longer periods, and it’s good to understand that.
To find the average inflation rate since mid-2007, when KiwiSaver started, go to the Inflation Calculator on the Reserve Bank’s website. It shows that since the third quarter of 2007, annual inflation has averaged 2.4 per cent.
To adjust for this, when we use an online calculator to see how much $1000 would grow, at 6 per cent after fees and tax, we subtract the 2.4 per cent inflation from 6 per cent, and use 3.6 per cent. (This is not perfect mathematically, but near enough for our purposes.)
That gives us a little more than $1700 — compared to $2450 without inflation. And if we are looking over 65 years, which we also did last week, we get $10,350 — compared to nearly $49,000 without inflation. Wow!
If the Reserve Bank succeeds in its current attempts to bring inflation back to its target midpoint of 2 per cent, that will reduce the inflation effect somewhat.
Q: There has been plenty of talk about examining your mortgage commitments in a time of rapid interest rate rises, and fair enough. But those, especially retirees, with longer-term term deposits should also take a look at those.
In the depths of 2021 despair, 2 per cent interest for a four-year TD looked like a reasonably good idea. What if rates went even lower?
Well, I did have some TDs in that category, totalling about $300,000, due to mature in 2025. What would happen if I broke them?
What happens is I have to pay back the modest interest that I have already received, and wait 31 days for the funds to become available. But in January I can put them on, say, a two-year term at 4.7 to 5 per cent, earning $10,000 more in interest over that time — even after paying back the earlier interest received.
There’s some small risk that rates might tank in the next month, but a risk worth taking.
A thought: just how many hundreds of millions (billions?) of underperforming TDs might our beloved big banks be quietly sitting on?
A: Who knows? But it’s certainly a good idea for people with long-term deposits to look into making a change like yours. Thanks for telling us about it.
One suggestion: when you reinvest, you might want to break up your money into, say, three lots, with different maturity dates — to reduce the risk that all the money will mature when interest rates are unusually low. I’ve described this before in the column. It’s called laddering.
Q: My situation is virtually identical to that of the gentleman who was rejected for an ASB Platinum Card in your recent article.
I am a 60-year-old semi-retired professional male, my wife does not work. We have a mortgage-free $1.8 million Auckland home and investments of $1.8m. We have no debt and live off my income (approximately $30,000 a year) and our investments.
We were also recently rejected by ASB as we could not show sufficient “income” to support the card. Perhaps you can work your magic in my case?
A: Says an ASB spokesperson, “Thanks for bringing this to our attention. From the information you’ve shared, it appears we did not have the full picture of this customer’s financial situation.
“We have reached out to the customer to request more information and will take another look at their application based on that.”
It sounds as if ASB needs to make some changes to its credit card application form.
I hope the magic works!
Q: Just a thought from your recent column. Selling a property before you buy is great advice — but I would strengthen this by clarifying that selling means not just getting an unconditional contract, but having that contract actually settled.
In other words, don’t act on your sale until the cash is in the bank! Or, make any purchasing contract conditional on your sale being settled.
I have personally had two unconditional sales fall over — but fortunately had not entered any purchase agreement in the meantime.
A: Thanks for words of wisdom from one who has been there.
Q: I’m a 56-year-old with a split growth (sustainability fund)/ balanced fund portfolio. I’m assuming if I want to be able to withdraw from one fund only after I turn 65, if ANZ doesn’t change its policy in the next eight years I can simply transfer to another provider that does allow that, such as ASB? Incidentally, the reason I want to stay where I am for now is my penchant for the sustainability fund.
A: Yes, you can transfer to another KiwiSaver provider at any time. All you do is contact the new provider and they will arrange to move your money.
Can I just suggest you don’t consider only the big KiwiSaver providers? There are some really good low-fee smaller providers that offer funds that invest with the environment in mind.
The Mindful Money website gives you info on who offers what. And the KiwiSaver Fund Finder tool on sorted.org.nz will help you find providers with low fees and good services.
Q: I have written to you before describing how we saved 10 per cent of our income all our working lives and never spent any of it. We invested in shares and had a diversified portfolio.
We have always followed the answers you gave in your columns. We have a mortgage-free house and very ample funds to live on. We had enough saved to retire at 52 and 50 years of age.
I am currently de-cluttering and found cuttings of your column (I have attached 2004 and 2005 examples). You are still being asked the same questions you give similar answers to, and I still read letters written to you casting doubt on your answers. We are examples of how sound your answers are. As ever, a big thank you from us both.
A: And thanks to you for a lovely encouraging letter. You’re right — most of the basic messages don’t change over time, although there are always new variations on the themes.
Thank you so much to all the people who have written to this column this year. Every year the number of letters grows, and the chances of your letter being published reduce. But I still read all the letters. They help me understand what is troubling, puzzling, or sometimes amusing readers. I do appreciate every email.
Thanks too to all the experts who give me information to pass on to you.
I hope everyone has a relaxing break over the next few weeks. See you again on January 28.
- 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 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 click here. 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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