Soaring house values have made lots of people rich... on paper. Photo / 123RF
OPINION:
Q: What defines a millionaire in New Zealand?
My wife and I are both retired and receive the NZ Super. The recent house valuations are showing our house at $1.9 million. We have cash and assets worth just a tad over $200,000. Combined, we are worth more than $2 million.
Does this make us a millionaire couple? Are we millionaires as individuals?
Mary, I do realise an independent valuer would show our house as being below the valuation by QV. I also realise that being a millionaire these days is no big deal.
Growing up in Fiji, I sometimes wondered if I ever would be a millionaire — a big deal in those days. I must add that we do not have any debts.
A: Congratulations! It seems you and your wife have each attained your childhood dream. But as you say, it may not mean much.
The usual definition of a millionaire is someone whose net worth — assets minus debts — is $1 million or more.
So your last sentence is important. While the average house value in New Zealand is now just over $1m, many homeowners have mortgages or other debt. They won't be millionaires until the total value of their house and other assets exceeds their debts by the magic million.
Still, plenty of older people who have paid off their mortgages are finding themselves in the Millionaires Club. So what?
If you have the majority of your wealth in your home — as you do — it could be argued that it doesn't make much difference what the price tag on that home is. You might move, but the price of any new place is likely to be in line with the price of the old one. It's not until you move into old-age care or die that the value of your home really matters.
The unimportance of house values might actually turn out to be a comfort in the next little while. House prices are already falling in some regions, and nobody knows how far they will drop. But as long as you're not moving from a falling region to a rising one, declining prices don't really matter. Forget about the house market and read a novel.
History tells us prices will eventually recover.
However, there's one exception to the "prices don't matter" way of thinking. If your home has a higher value, you can borrow more against it, perhaps in the form of a reverse mortgage, as discussed recently in this column.
I hope I haven't burst your balloon too much. You've done well financially. To see how well:
• For a comparison with other New Zealanders, go to tinyurl.com/NZHowRich
• To find out how you rank in the world, go to tinyurl.com/WorldHowRich
That should cheer you up.
Footnote: Wikipedia points out that it's much easier to be a millionaire in a country where the basic currency unit isn't worth much. "A millionaire in Zimbabwe in 2007 could have been extremely poor," it says.
"Because of this, the United States dollar (USD) is the most widely used currency standard to compare the wealth of people all over the world. Hence a person must have a net worth of at least one million USD to be recognised as a millionaire anywhere in the world."
Let's see now ... that means you need close to 1.5 million New Zealand dollars (NZ$1.43634 million at deadline time) to be a millionaire in the world's eyes. But let's just go with Kiwi dollars!
Q: I am in a KiwiSaver growth fund. Is it risky to change KiwiSaver providers after the recent drop in the share market?
A: If you're changing from one growth fund to another, the unit prices in both will probably have fallen recently. So it doesn't matter if you move.
If you're switching to a lower-risk fund, now isn't a great time to do that, as you'll make real the losses from the market downturn. But of course the market might fall further, and you'll be glad you made your move now.
A lower-risk strategy would be to move now to the new provider's growth fund, and then gradually move to their lower-risk fund — maybe a third of your money now, a third in a month and a third in two months. Most providers will let you do that.
Q: I read your book Rich Enough and was inspired to pay off my debts ASAP. I have no credit card or hire purchase. I've got a student loan balance of $74,000 and a 30-year home mortgage of $210,000, with $20,000 of it in revolving credit. I am in a dilemma of choosing which debt I should pay off first.
A: It's great that you have no credit card or hire purchase debt. Those high-interest loans are the real killers. But still, it's really good to get rid of any debt.
When you pay off a loan, you improve your wealth as much as if you had an investment with a return of whatever the loan interest rate is. And it's risk-free.
For example, the revolving credit part of your mortgage might be at 5 per cent — and rising. So paying it off is like having a risk-free investment with a 5 per cent-plus return. That's pretty good.
On the other hand, your student loan is interest-free, as long as you live in New Zealand. So paying it off faster than you have to is like having an investment with no return. While it's good to get rid of a student loan, paying down the mortgage is better for your wealth.
Q: An aspect of your March 12 column, in the context of charitable organisations, calls for a response.
You quote a friend of yours as saying "... I'd be wary of any charity that claims that every cent of their money will go to the beneficiaries ..." Such a statement — without explanation or qualification — does a grave disservice to charities which do exactly that.
We are one such charity — the Refugee Family Reunification Trust. In 20 years we have raised over $2.4 million, and every cent has gone to refugees. We rely entirely on volunteers, and separate donors specifically fund our unavoidable administration costs, such as audit fees, postage and printing our annual newsletter.
As a "pure" charity, to have a shadow cast over us in a column such as yours risks undermining our ability to keep helping some of the most disadvantaged in our society.
A: Sorry to have caused consternation. I wonder, though, if there might be a few hairs being split here.
On your website, you say, "We do not pay for advertising, fundraisers, salaries or rent — so that 100 per cent of donations can be given to refugees. No remuneration is paid to the Trustees. Separate funding is obtained specifically for necessary administration costs, and we are able to keep these costs to a bare minimum due to the Trust's reliance on unpaid volunteers."
That's quite different from saying, baldly, that every cent goes to beneficiaries. I can't imagine that anyone reading your website would think, "That's a charity making unrealistic claims," which is what my friend — who is an expert in this area — was talking about.
Good on you for the work you do. It sounds excellent. And now you've got some free publicity!
Q: I read your article suggesting your reader consider school secondary scholarships as a charitable gifting idea. Following the death of my mother I realised that the cost to attend university, and in particular to study science or engineering, as a woman, was extremely high.
Sadly, my own mother (who was a good mathematician) could not get to university from a one-parent, post-Depression emigree family. I decided to found a trust which would provide a scholarship to pay the fees for a student from my and my mother's old school, Epsom Girls' Grammar School.
It was limited to covering three years' fees at a New Zealand university for a science degree, but excluding medicine, dentistry and veterinary studies. With the help of an old school friend, the trust was formed at, I may say, a very large cost, even with her huge fees rebate. Over the years the university fees have risen faster than the income derived from my trust's portfolio, so the scholarship has been modified.
In order to preserve the trust into the future, I have just finished transferring it to the management of the EGGS Old Girls Association as a registered NZ Charitable Trust.
Should the person you wrote to be interested in pursuing this approach, I would be happy to provide them with a copy of our trust deed which they could then, with minor changes and little or no cost, register and use to pay out to schools or whatever they feel most strongly about.
I would be happy to supply this through yourself so that you could pass it on to other worthy recipients and keep their funds to pay just the registration fees and not the legal drafting costs.
When I set this up, there were detractors who thought all girls at EGGS came from wealthy families. More than 25 years have shown this to be untrue, so in some small way it increases the pool of women's science talent which is vital to our economy.
A: That's a very kind offer. Any interested reader can email me and I will give them your email address.
Well done for setting up the scholarship.
Q: In response to your last article, I get a very small Canada Pension of around $9 a month. I had no idea I was entitled to one until I was forced to fill out all the forms by NZ Superannuation requirements.
And it was a full year after application before I received any payment from Canada. They persist in sending snail mail at surface rates! I am sure the administration costs to New Zealand of keeping track of, and informing me of, currency fluctuations affecting my monthly amount are far greater than the amount the Canada Pension pays. It is a ludicrous system.
A: I take your point. But perhaps there would be even more admin costs to weed out the people who get tiny overseas pensions?
Best to just shout yourself a couple of coffees on the Canadians, and laugh about it!
Q: I am a pensioner who worked in Canada in 1985 and 1986. I advised MSD of this and told them that while there I had paid no tax — zero. Despite this honest and straightforward statement, I was "obliged" to apply for a Canadian pension. Multiple forms were filled and threats were made that if I did not comply, my pension was at risk.
Finally, after two years of haranguing by MSD my statement was accepted. What a waste of time and effort. It seems honesty is not accepted by MSD, contrary to Mr Van Uffelen's statement in last week's Herald.
A: At the risk of angering you, can I just say that after you told MSD that you worked in Canada but paid no tax, perhaps they felt a little uncertain about your trustworthiness. If you had a legitimate reason to pay no tax, please forgive me!
Q: Being honest and getting part of my pension from overseas is a nightmare. Trying to sort out my Canadian tax rate is never-ending! Paying more on the Canadian portion than the NZ portion. Thought I had it sorted, but just got a form letter telling me application rejected, and I need to complete another form.
Actually that's a real pain for me as I have an autoimmune disease, and one more thing to do is just too hard! And as Kiwis get older they will get too old and they, like me, will end up paying 25 per cent tax instead of 17.5 per cent on a portion of their income. Need NZ Government to agree with the Canadians that minimum of NZ or Canadian rate applies.
Lie? You bet. Most of my friends have.
A: Your experience does sound like a nightmare, especially if you are unwell. And the above two correspondents also refer to heaps of form filling. It's not easy to see how to get around that, though. We can't change foreign Governments' forms. And I still think the basic policy is fair. But perhaps our Government should put more resources into helping people with problems like yours.
By the way, I wonder why Canada seems to loom large in the Pension Problems area.
- 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. 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.
'Debt becomes more like a rent payment that people get so used to paying.'