KEY POINTS:
Q I have a daughter who has just entered the workforce. She has signed up to a default KiwiSaver scheme and as such is in a conservative investment.
Is this the best option for a 23-year-old, or should she look at a longer-term plan with more growth?
A. It's great that she has made the most important step by far - signing up for any KiwiSaver fund. The next step - and there's no big rush to do it - is to consider whether she is in the best fund for her and, if not, to move into it.
Her best investment choice depends on whether she owns a home and, if not, whether she wants to buy one in the not-too-distant future. If a home purchase seems likely, she can take advantage of the KiwiSaver first home incentives.
Many people know about one aspect of this - the first home subsidy. As long as your household income, for two people, is less than $100,000 (or $140,000 for more than two people), after you have been contributing to KiwiSaver for at least three years, you are eligible for a gift from the Government towards buying your first home.
The amount is $3000 after three years, ranging up to $5000 after five years. A couple can each get the subsidy, so the total could be as high as $10,000. That's not a bad boost to a deposit.
The home must be your main residence - not a bach or rental property - and it must be in the bottom 25 per cent of houses, by price, in your area.
Not so many people know about the other aspect of help for first home buyers. Regardless of your income or the price of the house, anyone in KiwiSaver for three years or more can withdraw their own contributions, their employer's contributions plus all the returns - interest, dividends and so on - earned in their KiwiSaver account to put towards the home. The Government's $1000 kick-start and tax credits must remain in the account.
If your daughter plans to make the most of all this, her KiwiSaver fund choice depends on how long it will be before she expects to buy the home. If it's three to five years, she should probably move to an even more conservative fund than the default fund - perhaps one that invests entirely in high-quality bonds, cash and similar.
Default funds have 15 to 25 per cent of their money invested in shares and/or property. And there's a fair chance over that short a period that those more volatile investments could take a plunge, dragging down her total.
However, if her house buying is more likely to take place in six to 10 years, she is probably fine where she is in the meantime. I suggest she moves to a more conservative fund once she is about five years from purchase.
On the other hand, your daughter may already own a home. Or she might be one of the growing number of younger people who don't ever plan to own their own home and still do just fine financially as long as they save for retirement in other ways.
If either of those is the case, she has more than 40 years before she is likely to take out her KiwiSaver money. That means she should consider investing in a riskier KiwiSaver fund, holding all or mostly shares and/or property.
The downside of this is that the fund will - not might, but will - wobble all over the place over the years. There will be times when the value of her account will plummet, possibly even halving or worse. As her account grows, that might mean a drop of several hundred thousand dollars. Has she got the courage to stick through such downturns?
If not - if she would panic and transfer her money to a more conservative fund when markets are down and thus seal in the losses - it would be much better if she is not in such a fund in the first place. She would be wiser to start out in a more balanced fund, with perhaps half shares and/or property and half bonds. The market falls will be softened by the steadier growth of the bonds.
However, if she can cope with the downturns - knowing that history tells us they always end, usually well within 10 years and often within just a year or two - she will almost certainly end up with more money at retirement and, quite possibly, more than twice as much as in a balanced fund.
Those are the choices. I realise they might not be as easy to make as they sound. Many young people have little idea what they will do next month, let alone in several years' time.
If she simply hasn't made any house buying plans, I suggest she errs on the conservative side until her plans are clearer, perhaps staying in her current fund.
Q. How dare you call me a tax evader in last week's column. My purchase of a Blue Chip unit in Queenstown was solely based on trying to better my life a little, not a lot, only a little.
At 58, I would like to have my home paid for in the next few years but now that will never happen.
The Government tells us to plan for our futures and, when we do, we are told we didn't do enough research. I did do what I thought was a fairly good job of researching Blue Chip, but don't forget all the laws that allow dodgy people to hide behind other companies, making research a difficult thing for the average Joe.
I spend more time reading the business section than the sports pages, which led me to try to do something good for my wife and me.
Let's not forget the BNZ scandal of over-charging back in the 1990s and the Government saying, "Never again in NZ". Yeah right, they did nothing to change the laws and it has happened all over again.
I have to believe by your article that you have never had a bad auto repair, or every doctor visit had a perfect outcome, or every paint colour you ever chose was just right or, even better, every politician you voted for has lived up to your high standards. Because according to you, one must do their research and if you're caught out, you're stupid. Well thanks for that, lady.
A. Did you by any chance read last week's column on the Herald website, rather than in the paper? For a few days - until some thoughtful people pointed it out - readers couldn't easily tell what was a question and what was an answer. And it seems that you have confused a reader's opinion with my opinion.
That's scary stuff for me, given that I often disagree with readers. And this is a case in point. While the correspondent last week said Blue Chip investors "were probably looking at tax avoidance", my reply said, "Paying less tax is not the motivation for all bad investment decisions. And it's too easy to put it down to greed."
I continued, "I think Joe and Joanne Blow get tired of hearing other people's 'get rich quick' stories and think that if they take a bit more risk they, too, will be millionaires in no time. And sometimes it works. It's just that we tend to hear more about the collapses - particularly in recent times."
I could almost have been describing you, right down to the name Joe.
I did go on to say, "It's really important to understand an investment. Also to work through a 'worst case scenario' to see if you could cope - particularly when borrowing to invest, as you point out with your list of hazards.
"One of the golden rules of investing has got to be KISS - keep it simple, stupid. If you don't want to put hours into research, stick with bank term deposits, high-quality corporate bonds and low-fee diversified share funds."
But I didn't imply - nor do I think - that if you're caught out you're stupid. Luck plays a part in most investments. And, as you say, dodgy practices are hard to see through.
Sorry for the confusion in the column. I feel for you and all the others caught in the Blue Chip downfall. I hope you end up getting at least a fair bit of your money back, and that things turn out okay for you and your wife.
Q. Re the letters you have published about online tax payments and incorrect coding, I had the same issue.
What I discovered is that there is one code for "Goods and Services Tax" and a different one for "GST and Provisional tax". The latter is easily picked, due to the more common acronym used, but should not be used unless paying both GST and provisional together.
A. You're quite right - although, at least on my bank's website, the "Goods and Services Tax" code is near the top of the list and the other one at the bottom. So I'm guessing that most people will land up with the right one. But perhaps Inland Revenue needs to word the second option "Both GST and Provisional Tax".
I received another reader's letter saying her online tax payment was credited to the wrong year. "Three letters later, I am balanced."
She adds, "I'm sure there's plenty of others out there that haven't bothered to write but have had similar problems." And that's likely to be true. All the same, when something like this is really widespread, there are usually more letters than I've received.
In the end, the problems do seem to be resolved with no penalties. I suppose we have to accept that in any system involving probably hundreds of thousands of people, there will be some mistakes made.
MORE ON KIWISAVER
The answers to many readers' questions about KiwiSaver can be found on the KiwiSaver book page on www.maryholm.com, or elsewhere on that website.
Mary Holm is a seminar presenter and author. Her website is www.maryholm.com. Her 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 Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers or give financial advice.
