Having to start all over again in your fifties

By MARY HOLM

Q: We are confused with all the different investment options available: unit trusts, managed funds, balanced funds, investment trusts, capital notes, hedge funds, index funds, property funds, corporate bonds, share funds - Start Series, Tower Tortis and of course fixed deposit.

We are in our fifties and have no home or assets after a business failure and years of debt servicing, so it is back to basics.

We know we can't live on fresh air alone. But we need to take action now to build up some savings.

Our incomes are not large, but good. At the moment we can save $1000 a month, but that will increase considerably in 12 months.

So what is our best option for initial investments from the above list, or do we filter the money into bonus bonds in the hope of a windfall?

We cannot consider risky investment schemes after having lost so much.

A high mortgage is not appealing to us unless we have a good deposit. So we feel it is better to keep renting until we have accumulated sufficient funds to put into a fail-safe investment scheme, if that is possible!

I hesitated to use your letter in the same column as the first correspondent, for fear that you would be too discouraged.

You and he are both recovering from financial nightmares.

But he has time and a high income on his side, whereas you haven't got a lot of either.

But take heart. You're doing the right thing by assessing your situation now.

And with your planned savings, you should be able to make good progress.

Despite your last comments, probably the best alternative for you is to work towards buying your own home, and having it mortgage-free by retirement, if possible.

Most retired people like to know that whatever happens financially, they have a roof over their heads.

And they can't be kicked out by a landlord.

I agree that you shouldn't take on a loan that will keep you in debt through retirement.

But if you settle for a fairly modest abode, you could pay off a home loan in 10 years while you're still working.

At your current savings level of $1000 a month, you could get a 10-year, 7 per cent mortgage of $86,000.

If you can boost your monthly savings to $1500, you could borrow $129,000.

And if you could stretch to $2000 a month, you could borrow $172,000.

All these figures assume mortgage rates will stay at 7 per cent.

If they rise, so would your monthly payments.

But if interest rates rise much, that probably means inflation has increased, so your incomes will, hopefully, rise too.

Your other alternatives are investments in some of the types of funds you list at the beginning.

The trouble is, you're quite understandably unwilling to take on much risk.

If you were less risk averse, I would suggest you consider a share fund, perhaps a world index fund.

If you invested in that, there's quite a good chance you would be able to buy a better house, mortgage-free, in 10 years than if you take on a 10-year mortgage now.

You might even have some over for other spending.

The trouble is, you might not.

Nobody can forecast the share and housing markets.

If your ultimate aim is to have a mortgage-free home in retirement, it's less risky to get into the housing market now.

Also, given your history, I'm not sure that you would cope well with the ups and downs of such an investment.

If you want to keep volatility to a minimum, you have to settle for lower returns.

Term deposits, for instance, are pretty much fail-safe.

But you would probably do better financially, and certainly from the security point of view, by buying a home.

Don't forget, too, that you'll get a basic income from NZ superannuation.

And, I might add, you are the sorts of people who particularly deserve such support from the state.

For our economy to grow, we need people to set up their own businesses and take risks.

Inevitably, some aren't going to succeed.

If society didn't provide a safety net for retired people, fewer would be willing to take business risks.

And we would all be the poorer for it.

To clarify your long list, many of the items are different types of managed funds, which pool lots of people's money to invest in a range of products.

Unit trusts and investment trusts are two different ways of setting up managed funds.

Share funds, index funds and Tower Tortis products are managed funds that invest in shares.

Property funds invest in property.

Hedge funds, like balanced funds, invest in lots of different types of assets.

Capital notes and corporate bonds are fixed interest investments, issued by companies.

And START is a sharebroker's scheme through which small investors can invest in several of the above.

By the way, forget the bonus bonds.

Unless you win a prize, you make a zero return.

* Send questions to Mary Holm at Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net

Letters should not exceed 200 words. We won't publish your name, but please provide it and a phone number.