With a healthy divorce payout a lifetime of debt suddenly becomes a future of possibilities. Photo / 123RF
OPINION:
Q: After 20 years of being married to a wealthy partner who controlled the money, we have now separated, and I will shortly find myself in a position of being rather well off, around $3 million!
This is crazy, as I’ve spent a lot of my life in debt, as the relationship was not financially healthy / equal.
My question is what shall I do with it? I will need a modest house which I assume I should buy with cash. I would like to foster and grow this money while also getting a reasonable return if possible?
A managed fund, shares or perhaps some in a long-term deposit are good ideas? I haven’t sought financial advice yet. You are my first port of call.
A: Wow! You’ve hit the jackpot. But you are wise to seek help. There are too many stories of people who are suddenly rich and soon become not so rich.
Definitely buy a house with cash. With mortgages at their current rates, it’s great not to have to repay a loan.
You will be in a really strong position to negotiate a house purchase. House sellers don’t get many nibbles these days, and when they do it’s often from people willing to buy only if they can sell their current home for a certain price. A cash offer from you will be very appealing. So if I were you, I would offer considerably less than the seller’s asking price.
And you don’t necessarily need a modest home. You’ve got enough to buy something pretty flash if you would enjoy that.
What should you do with the rest of the money? That depends on your age, your sources of income, how well you can cope with market volatility ... all sorts of things.
I suggest you put some time into finding a financial adviser you feel comfortable with. Look for someone who charges you fees and receives no income from other sources. You don’t want them recommending investments because they receive commissions or other incentives.
Visit several and talk to them. You are interviewing them for the job of working for you.
For more on how to choose a good financial adviser, see an article on my website, at maryholm.com/advisers. It includes a link to a list of advisers who charge fees only.
Q: Retired widowed pensioner. Always been living hand to mouth and now I’m in the process of inheriting a lot of money over the next couple of months.
I find it very scary as no idea where to start. I feel like I’m too old to start trying to learn what to do with reading up on investments. Should I just leave it sitting in the bank?
A: These days leaving the money in the bank is not nearly as worrying as it was a year or so ago. You can get pretty good returns on bank term deposits now.
But you might as well get even bigger returns over the long term by investing in managed funds of some sort.
A good adviser can help you invest, and also explain it to you in simple terms. It doesn’t need to be at all complicated — honestly! See above for some tips on how to find one.
Q: My partner and I have just turned 65, and are about to withdraw a little bit of money from our KiwiSavers for a new hybrid car. I have an ASB KiwiSaver split 50 per cent conservative, 50 per cent balanced. My partner has a Kiwi Wealth KiwiSaver split 30 per cent conservative, 70 per cent balanced.
We want to withdraw from the conservative portions of our KiwiSaver but find that anything we withdraw will come out of both funds equally. It is not possible to withdraw from the conservative portion only with these two providers. The whole point of having some in conservative is that we wanted to use it soon. Can you help?
A: No, you haven’t missed the point. But some KiwiSaver providers have.
You’re doing what I and others recommend for retired people — putting the money you plan to spend in the short term in a low-risk fund, and the longer-term money in one or more higher-risk funds.
But for that to work, you have to be able to withdraw from just one fund. I asked KiwiSaver providers whether they let you do that — as opposed to withdrawing from all your funds at once.
The following said yes: ASB, Booster, Generate, Milford, SuperLife, and Westpac. The ones that said no are: ANZ, ANZ Default, Kiwi Wealth and OneAnswer. Mercer doesn’t currently permit it, but will do so from early next year. Providers who didn’t reply are AMP, BNZ, Fisher Funds and Fisher Two.
Simplicity doesn’t let members be in more than one fund in the first place. “We get asked for it maybe 10 times a year, but keep it simple and low cost,” says managing director Sam Stubbs.
But hang on a minute. You’re with ASB, and you were told you couldn’t withdraw from just one fund. But they said “Yes” to me.
Says an ASB spokesperson, “A customer over 65 with investments in more than one ASB KiwiSaver Scheme Fund is able to withdraw from one specified fund.
“We’re sorry your reader is having difficulty and would be happy to connect her with a member of our team to assist with her withdrawal.” Perhaps show them this Q&A.
Other solutions: Switch to a provider who does offer this service. Just ask the new provider to move you. Or you could move your money to several non-KiwiSaver funds and then withdraw from just one fund. But the fees will probably be higher than in KiwiSaver.
In a recent report, the Retirement Commission, Te Ara Ahunga Ora, said, “KiwiSaver providers should recognise the post-65 use of KiwiSaver and ensure their products have been adapted for the decumulation (drawdown) phase, as well as in the accumulation phase.”
I reckon this should include the ability for retired people in more than one fund to withdraw money from just one fund.
Footnote: I’m sure some smaller KiwiSaver providers also offer this service. If that’s you, let me know, and I will run a list next week.
Q: I recently bought a $710,000 house and have also just started investing in ETFs (exchange traded funds) through Hatch.
We have about $1000 surplus in money monthly. Should I invest this in a US ETF or use it to make extra mortgage repayments? Note, we’re already paying $62 more than the minimum weekly repayment on our mortgage. Also, would you recommend putting our investments in the US ETF or should I allocate some in an international ETF?
A: Whenever you are weighing up paying extra off a mortgage or investing the money, you need to compare:
If the mortgage rate is higher, you are better off paying down the mortgage. Getting rid of, say, a 6 per cent debt improves your wealth in the same way as earning a net 6 per cent in an investment.
The trouble is that you can’t predict the investment return — unless you’re in bank term deposits, which will always be lower than interest rates on new mortgages. On ETFs, who knows?
In this situation, usually I recommend paying down the mortgage. It’s like a risk-free investment, and puts you in a strong financial position in case you lose your job or a financial crisis befalls you.
In recent years, with mortgage interest rates exceptionally low, the case hasn’t been as clear-cut. But now that rates have risen, I think motoring into the mortgage is a winner again.
Having said that, you might want to continue regularly putting a little into an ETF. That gives you diversification, and you learn about markets. I would favour an international fund rather than a US one — to give you even more diversification. Any single share-market, including the US, sometimes performs worse than elsewhere.
Q: I have been in a company super scheme for more than 20 years. In this time my super savings have grown to $500,000. However, I have a mortgage of $640,000 at a rate of 3.1 per cent which expires next month.
I like the super scheme, but with a likely new rate of 6.5 per cent or more my calculations indicate I’m better to cash in the super and pay off the mortgage.
I can only withdraw all my money from the super scheme. The downside is that this terminates my inclusion in the scheme. I am six years from retirement age so would join KiwiSaver, meaning I lose 1 per cent of the company contribution (KiwiSaver 3 per cent versus company super 4 per cent).
A: This is the same issue as above, except that you are comparing paying down a mortgage with an investment you have.
And it’s complicated by the reduction in your company’s contribution to your retirement savings. To keep it simple, we’ll say you earn $100,000. The reduction in the company contribution would be $670 after tax.
If you keep the super scheme , is it likely to earn an annual return of more than the mortgage rate — say 6.5 per cent — after fees and tax? It might if you are fully invested in shares and perhaps property. But if your investments are lower risk, it almost certainly won’t.
Even if you add the extra $670 into the mix, that effectively adds just 0.13 per cent to your return on $500,000.
If I were you, I would use the super money to pay down the mortgage.
I suggest you stick to your old mortgage payments to get rid of the mortgage quickly. And if your own super contributions are also reduced, put that extra money into the mortgage too.
Q: My wife and I find ourselves in a quandary. We own a rental property worth approximately $950,000 with mortgages of about $550,000 in total. Two are due this month and will jump to the new term rates.
We’re able to cover these new repayments. However, there’s some money in managed funds that’s gone backwards that could be used to pay them down. We’d invested $1.6 million back in 2019 which is now down $100,000 in the meantime.
While waiting for global markets to return, we’re wondering if it’s sensible to use these funds.
A: Normally I don’t recommend selling managed fund investments when they are down — and certainly not because you can’t cope with the downturn. But your situation is different.
The question for you — again similar to the above two Q&As — is whether you will earn more in the managed funds over the next year, after fees and tax, than the mortgage rate you will pay.
The answer is that nobody knows.
But you would be withdrawing only a portion of your fund money, so I would be inclined to do that, and pay off the mortgages. If the markets roar ahead, you will still benefit on $1 million or so. And if they don’t, you’ll be glad you made the move.
- 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.
'There’s not a lot of resilience in the system.'