Mary Holm: Stop me squandering our windfall

Put your nest egg in the bank for a bit to avoid lashing out on a new kitchen.

Inheritance will make retirement easier, so set up plans to save.

My husband is 67 and has no retirement savings. I am 60, with a small amount in KiwiSaver. My husband has just inherited $120,000. He refuses to go to a financial adviser as he doesn't trust them. Instead he trusts me to manage the money, which scares me. My financial history shows that I spend up to our income, and when we need expensive items I just add it to the mortgage. Hence we still have a mortgage at our age.

I want to use the money for our retirement, but I am already thinking new kitchen and Aussie for Christmas. I need to put the money where I can't easily access it and where it can be drip-fed to us in five years.

Well done for acknowledging your "weakness". That's an important first step to changing any behaviour.

It would be a real pity to squander this opportunity to make your retirement much more comfortable.
My first suggestion is to put the money in a bank term deposit for a month or two, to keep your sticky fingers off it while you make a longer-term plan. And here's what that plan could be:

Step 1: Set aside $1000 or $2000 to enjoy - maybe on a modest kitchen update or trip.

Step 2: Put the rest into repaying your mortgage. You'll be better off in retirement with the mortgage lower or gone than with drip-fed money.

If all or part of your mortgage is fixed-rate, there might be a penalty for paying it off early. If that's significant, you could put the money in a bank term deposit to mature when the fixed-rate period ends, then pay off the mortgage. Ask your bank to help you work out which option is better.

Step 3: Tell your bank that you no longer want to be able to add to your mortgage in future. It should support you in that.

Step 4: If you have any money left over after paying off the mortgage, put it in your KiwiSaver account. That way you can't get access to it until you turn 65.

Step 5: At 65, ask your KiwiSaver provider to set up a drip-feed to you. If it won't do that, switch to a provider that will. Last time I asked, a few years ago, these providers offered that service: AMP, ANZ, Civic, Fisher, Kiwi Wealth, Medical Assurance, Milford, NZ Anglican Church, SuperLife and Westpac. Others may have since started doing this.

A worry: In retirement, you can always withdraw more KiwiSaver money than the drip-feed. But hopefully by then you'll be used to thinking of that money as untouchable.
If not, you could take the money out of KiwiSaver and put it in a range of term deposits - say a three-month one, a six-month one, a nine-month one and so on, for years into the future - so you can spend each lot of money only at maturity.

By the way, I think your husband's attitude to advisers is too harsh. The Info on Advisers page at www.maryholm.com tells you why I think some advisers are more trustworthy than others, and has a list of advisers you might consider using.

KiwiSaver or not?

My daughter and her partner are both aged 23 and saving towards a first home. They are both in KiwiSaver and are contributing 4 per cent of their salaries. They are considering increasing their contributions to 8 per cent.

I wonder if they would be better to put the extra 4 per cent in an investment fund outside KiwiSaver. If they should decide not to purchase a house, or through some good fortune be able to buy without using their KiwiSaver funds, or perhaps buy an investment property first, they could access that money for another purpose, whereas the KiwiSaver balance would be locked in until age 65.

What are your thoughts on this?

You're right. Unlike the previous correspondent, your daughter and partner might find the loss of access to their KiwiSaver money is a negative.

If they like their KiwiSaver funds, they could set up automatic transfers into similar non-KiwiSaver funds offered by the same providers. They should look for funds with lower or similar fees to KiwiSaver.

I'm 55 and I have saved $35,000 in my KiwiSaver account. I have a term deposit of $25,000 which is about to mature, and it seems putting it back into a 12-month term deposit isn't the smartest thing to do right now.

On TV, I heard a man say that anyone 55 or older would make more money by putting their money in KiwiSaver rather than term deposits.

I don't own a home, I have no debts and I work full-time as a teacher. Do you think it's wise to put my $25,000 into KiwiSaver?

I have no plans to buy a home (can't afford it), I'm not interested in going on overseas trips and I can easily save for a new car if I need an upgrade. I'm just a little nervous about putting such a large sum, my life savings, into an account for 10 years. Tell me what you think.

A two-part answer. Part one: Directly answering your question.

I'm a bit worried about the message from the man on TV. It's true that - in the past few years - most people would have made more in KiwiSaver than in bank term deposits. But will that continue? Nobody knows.

In a low-risk conservative KiwiSaver fund, you will probably earn a bit more on average, after fees, than you would from the bank. But there will be some periods in which you'll earn a bit less. It may not be worth moving your money to such a fund, given that you lose access to it.

In a higher-risk KiwiSaver fund, on average you should make a fair bit more. But the price of that higher return is that in some periods your account balance will fall. And in growth and aggressive funds some of the falls will be big. You need to have the stomach for that, and not switch to lower risk after a downturn.

Let's assume for now that you can cope with volatility. Should you put most of your $25,000 into KiwiSaver, and transfer the lot into a higher-risk fund if you're not already in one? That depends on when you expect to spend the money.

The rule is to use a high-risk fund only for money that you plan to spend more than 10 years later. That gives you time to recover from a downturn. It's rare that a high-risk fund doesn't grow over any 10-year period.

While you don't expect to need the money in the meantime, it's always good to keep at least a couple of thousand dollars readily accessible.

In your case, you've got 10 years before you gain access to your KiwiSaver money, at 65. If you expect to spend the money soon after that, there may not be a lot of point in moving into high risk now and then reducing risk in the next year or so.

But if you plan to spend the KiwiSaver money over several decades, you're in a position to take more risk.

One possible strategy is to invest in two KiwiSaver funds with the same provider. Put the long-term money in high risk, and the shorter-term money in a medium-risk balanced fund.

Now let's assume you're not tolerant of volatility. In that case, stick with a balanced fund - or even a conservative fund - throughout.

You may have noticed that I said "most of your $25,000 into KiwiSaver" back there.

While you don't expect to need the money in the meantime, it's always good to keep at least a couple of thousand dollars readily accessible.

Part two of my answer: Despite what you say, it would be great to see you buy your own home.

It can be fine to still be renting when you retire, but only if you've saved heaps to pay for accommodation throughout retirement. There are still the problems of landlords kicking you out, and you having less control over your home environment, but some people can live with that.

But for you, setting a goal to own your own place by the time you retire may be the best way to go. And it can be done if you aim for a modest home outside Auckland.

Last year, this column included a Q&A about a man who expected to save $60,000 to $70,000 by age 60, and wondered if he could get a mortgage at that stage. The situation is similar to yours, and the short answer was "yes". To read the Q&A, see tinyurl.com/homeat60

Planning ahead

I have just read your answer (a very good one) about the perils of using life expectancy average figures in retirement planning. You may be interested in a couple of posts on the same subject at www.longlifepensions.com. They are at www.tinyurl.com/longlife001 and www.tinyurl.com/longlife002

I have researched why we tend to underestimate how long we are likely to live, and I would be more optimistic - in the sense of living longer - than even the SuperLife calculator.

You are right, too, in saying that experts tend to focus on the average for a population, when it is so important for retirement planning to understand the range of possibilities.

And bear the site in mind for big picture/policy comment on longevity, KiwiSaver, decumulation etc.

Given your expertise in the area, I appreciate your comments. Readers interested in exploring this topic further will find the website useful.

Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and 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.