Money Matters: Nice townhouse a sensible option

By MARY HOLM

Q: We are a couple in our late seventies, who are house-sitting until December while the owners are overseas.

We have recently had finance from the sale of a mortgage-free house paid into our joint account, and will shortly be moving more money, which we have on term deposits in Australia.

We are looking to buy a townhouse in November and to settle in this area.

We are being strongly advised by our family not to buy a property but to rent, as we are aged and might have another 15 years of life left.

They say we should put our money with a money manager and get good interest, mentioning one bank investment which, we are informed, is paying up to 13 per cent with funds on call.

In the past, we have been badly burned by a fund managing company, and also paid dearly in the 1987 stock market crash.

Our family are acting from the best of motives, as they want us to enjoy our last years.

If we rented, we would have to live, in part, off our capital as any interest received would be insufficient to live on, plus superannuation.

We look forward to any advice you can give.


A: It's great to see your family putting your interests ahead of their own. But I'm not sure that their advice is right for you.

First, I want to comment on your statement that, if you rented, you would have to live in part off your capital.

But would you be better off buying a townhouse?

If you did, you'd have no rent to pay, but you would have to cover rates, insurance and maintenance.

And you would receive a lot less interest income, because a big chunk of your capital would go into the house.

You can work through endless examples, some of which will favour renting, while others favour buying. It all depends on the estimates you make.

And if you're making those estimates, I wouldn't assume you'll make 13 per cent on your money, because I wouldn't advise you to go with such an investment.

Why? The bank must be charging more than that to whoever it lends your money to. And those borrowers must be rather wobbly characters if they have to pay more than 13 per cent for their money.

Or, the bank might be doing some other clever tricks with savers' money, perhaps involving gearing, or futures or options.

Whatever the deal, one thing is certain: no investment these days pays 13 per cent, especially on call, unless it is pretty risky.

Given what you say about previous experiences, you don't sound to me like risk-takers. You're better to assume you would put the money in term deposits.

But, before you get your calculator out, let's look at other aspects of your choice.

The great advantage of renting - which I presume your family have in mind - is that you won't be tying up perhaps a couple of hundred thousand dollars in property.

You could then assume you're both going to live another 15 or 20 years, and plan to spend your way through your capital. Why not?

Or, you could buy a joint annuity with some of your money. That would give you guaranteed monthly income until you both die, even if you both make it past 100.

And it would simplify matters. You wouldn't have to worry about how fast you were going through your capital, or what future interest rates will be.

For more on annuities, see the next Q&A.

The downside of renting is that your home is not your own. There might be limits on how you decorate it and so on.

The landlord might sell to people who wants to live in the place themselves. You might be turfed out of a home you love in your eighties. That's a serious worry.

Reading between the lines, I also sense that you're a bit concerned about how to invest your money.

If you went with just term deposits and/or an annuity, the worries would be less, but so would the income.

If you went for higher returns, you might lie awake at nights bracing for another crash, or wondering if your adviser is making bad choices or ripping you off.

At your age, who needs it?

If I were you, I would look for a nice townhouse that doesn't use up all your funds. Keep some aside, perhaps in term deposits, and feel free to eat into that capital.

Thank your family for their thoughtfulness. But tell them the best way for you to enjoy yourselves is to have your own home and not too many investment worries.

Q: I am a 66-year-old widow. I have a mortgage-free home and three children who are all doing OK, but I would like to be able to help them if they need financial help. I receive NZ Super and have $220,000 in term deposits earning 6.1 per cent until the end of this year when the rate might drop.

I have $100,000 in a bank mortgage fund earning approximately 6.7 per cent.

I also have $80,000 in a managed conservative portfolio of mixed shares, bonds and property.

I require about $18,000 plus Super to cover my lifestyle.

I previously had most of my money in the conservative portfolio, drawing a monthly income off it.

But I was not happy in a falling market, taking from it regularly, so I have returned to fixed interest to supplement my income.

I took a loss of $10,000 changing back to fixed interest, but at least I know I will earn about $16,000 after tax this year.

What do you think of this arrangement, and can you advise me of a better plan?


A: Your arrangement has its merits. One good feature is its simplicity.

It's a pity, though, that you pulled out of the conservative portfolio because the market was falling.

Whoever put you into that investment should have warned you that can happen sometimes. They should have made you promise you wouldn't bail out in bad times, and supported you when the crunch time came.

The value of the assets in the fund will, almost certainly, rise again. I would be surprised if, a few years from now, you're not wishing you had left more money in it.

Still, what's done is done. And if you're one of those people who really can't cope with market volatility, I guess you're better off out of the markets.

Given your strong desire for security, your investments seem quite suitable.

But I think you should consider putting some of your savings into an annuity.

True, that money would no longer be available to help your children. But you would still have other investments, and the kids could get the house when you die.

In your retirement, it's time to stop putting your children's needs ahead of your own. You've probably done that all your life. It's your turn now.

I got some annuity quotes from Tower for a woman your age.

If you gave them $300,000, you would get monthly payments that totalled $18,000 in the first year. That money is already taxed, so you would pay no further tax.

The amount would then rise by 2 per cent a year, until you die - a good hedge against inflation. And you would still have $100,000 to invest elsewhere.

Or you could give the company around $167,000 and get $10,000 a year, rising by 2 per cent a year. You would then still have $233,000 in other investments.

Annuities have had some bad press lately. Some people say they're not a good deal, because you use up your capital.

But no other investment is guaranteed to pay you the same amount - or with this type of annuity a steadily rising amount - for the rest of your life, regardless of what happens to market returns.

If you live long, you certainly get your money's worth. And if you die young, you won't be around to care about it.

Your family might, however, feel ripped off if you died soon after the annuity started.

To prevent this, you can ask for guaranteed payments for, say, ten years, even if you die sooner. At your relatively young age, such a guarantee wouldn't add much to the annuity price.

Annuities get cheaper as you get older because the insurance company doesn't expect to have to pay out for so long.

In case you're not keen on the idea of an annuity just yet, but would consider buying one later, I also got some quotes for a 76-year-old woman.

Obviously, conditions will change between now and when you're that age, but it gives you a rough idea.

If you were 76, you would have to pay just over $200,000 to get $18,000 a year at first, rising by 2 per cent a year.

For around $113,000, you would get $10,000 a year, rising by 2 per cent.

Given that you would pay no tax on that income, it doesn't seem a bad deal to me.

Q: Can you tell me where I can go for a course about investing in New Zealand stock? I live in Auckland.

A: Your best bet for a reasonably priced course is your local high school.

Many of them offer Community Education programmes for adults, with classes in the evenings and on weekends.

Some classes are one-offs, others run for several weeks.

Look out for course lists left in your letterbox, ask for information in your local library or phone nearby schools.

There is a website that lists courses, called Community Education, but many schools have not yet put their programmes on it.

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