Money: Sacrifices pay dividends

By PHILIP MACALISTER

Vanessa Watkins is a 24-year-old Rotorua nanny who is keen to start investing, while Richard Macgillicuddy has recently retired after a lifetime of saving.

Both recognise the importance of starting early, and being committed to the cause.

Mrs Watkins would rather invest her money than spend it, although, as she is young, retirement is not necessary the present goal.

Mr Macgillicuddy, an Aucklander who worked as an airline executive before retiring, joined his employer's superannuation fund as soon as he was eligible and doggedly stuck to making contributions for all his 35 years with the company.

They both recognise the need to put off today's spending so as to have money tomorrow.

Says Mrs Watkins: "I like nice things, but there are more important things to do with the money than spend it."

Likewise, Mr Macgillicuddy, 67, says he preferred to have his money in the super fund than spent on a new car and the latest model of everything.

Mrs Watkins' awareness of the need to squirrel money away is unusual for someone her age. For most 24-year-olds the issue of saving, let alone saving for retirement, falls into the category of "nice idea, but I'll deal with it tomorrow."

Mrs Watkins has not only done something about it but she makes the important distinction between saving and investing.

To her, saving is when the money goes into the bank and does little. Investing is where the money is put to work and made to grow. It's an important distinction and one which many people do not make.

Mrs Watkins is keen to use her money to add to its capital value, and, like many New Zealanders, she is into buying houses and doing them up.

She bought her first rental property at 19 almost by accident, while living in Tauranga. She had wanted to move out of the flat she was in, did not like the idea of paying rent, and in typical Kiwi fashion wanted to own a house.

At the time a friend, who had had rental properties before, was interested in getting another. They bought a house in Rotorua (where he worked) for $75,000 and lived in it for two years before selling it for about $89,000.

She describes that as a successful exercise. After travelling overseas she returned to Rotorua, got married and now has another two properties.

The first of these was bought as a renter while she and husband Craig lived on the family farm west of Rotorua.

However, after spending a reasonable amount of money on the place getting it ready to rent, they had difficulty finding tenants. They decided to move off the farm and live in the property themselves.

The latest house they have bought is as somewhere to live - for now.

Despite falling into investment property almost by accident, Mrs Watkins enjoys it because it is something she knows about, and she likes doing places up.

But having difficulties finding tenants has been a bit unsettling, and is reported to be a reasonably common problem at present among people with investment properties. If anything, the problems have made her more keen to explore other, easier, investment options.

The difficulty is knowing what to do. Mrs Watkins takes a keen interest in learning more about other investments and reads books (including ones on how to reduce the burden of a mortgage).

In contrast, Mr Macgillicuddy is now in a position to enjoy his golden years after the sacrifices made during 35 years of working for Air New Zealand in marketing and management.

He had a plan - a simple one, but one which took dedication and commitment. His goal was to ensure that when he reached retirement age he would be financially self-reliant. To achieve it he stuck to three principles: start saving early, save regularly and reduce debt quickly.

Mr Macgillicuddy now sits on a portfolio worth more than $2 million. His is a fine example of what a disciplined savings regime can achieve.

He had already worked out his goal of financial independence when he joined .

His opportunity to implement his plan came soon after his joining Teal Airlines (the predecessor of Air New Zealand) in Sydney. The superannuation scheme, which he became eligible to join after a year, was a generous one as the company matched employees' contributions 2:1.

Mr Macgillicuddy committed himself to contributing to the scheme for 35 years, but recognises the hardest time was the first 20. During that period he had to pay off the mortgage, raise two girls and go through the experience of being widowed.

As time progressed, however, the plan got easier as his outgoings reduced and his pay rose, allowing him to accelerate payments into the super fund in latter years.

"It's the last 10 years when you make money on it," he says.

Mr Macgillicuddy has been so devoted to his plan that he has rarely ventured into other investments, such as shares, forestry or 10-acre blocks.

The main diversions have been the five small businesses he and second wife Sandra have established over the years. These are where he has learned several lessons.

One was about debt; another was investing in a friend's business without doing enough research.

Mr Macgillicuddy says that in one of the earlier businesses he and his wife borrowed some money to buy a piece of equipment, but when they went to repay the loan early, the bank slugged them with an early repayment fee.

That experience put him off debt and made him structure all the future enterprises on a basis of having no loans.

The second lesson was when he invested $10,000 into a mate's business and lost the lot because the venture was undercapitalised and he had not done sufficient research. "It was a hard lesson, but it was a good one."

It is also a lesson which he has carried through to the start of his retirement.

In true Macgillicuddy fashion he started planning for it some years before the actual event.

"I decided to go to Auckland University to find out what to do with my retirement finances," he says.

"Of course, the matter was far more complex than I thought it was.

"You've always got a friendly bank manager who is prepared to take your money and do things with it, but they are in it for the gain, not necessarily the pain, so I decided to look at it more deeply."

In the end Mr Macgillicuddy decided he needed his not-insubstantial portfolio managed by a professional.

"I needed to set up a relationship between myself and my financial manager, as opposed to people who are just taking my money."

The person he first turned to was the man who taught the course, 1999 Financial Planner of the Year Dr Rodger Spiller.

As you would expect, Mr Macgillicuddy did not just go to Dr Spiller and give him all his money. Dr Spiller had to prepare a plan, which was reviewed by two other experts, one in New Zealand and one in Australia, and he got only a small portion of the portfolio to begin with.

Mr Macgillicuddy says he was extremely pleased with the portfolio's performance and Dr Spiller now manages all the money.

His advice to other people is: "Don't try and do it yourself. At some time you will get tripped up by a smooth talker."

He says people should treat their financial planner like their doctor.

"They are specialists looking after a specific need. You've got to have confidence they have your best interests at heart in the long term."

Despite having professional advice, managing a portfolio is no doddle.

Normally Dr Spiller would provide Mr Macgillicuddy with a two-monthly report, but when the Asian crisis hit he told Dr Spiller: "I don't want to see one of those for six months. I don't want to torture myself."

When he looks back to when he joined the super scheme, Mr Macgillicuddy realises there have been sacrifices made along the way to get to this point.

"It's like the old sporting saying: no pain, no gain."

Now, though, most of the pain has gone and it's time for him to sit back and enjoy a comfortable retirement.

* Philip Macalister edits online money management magazine Good Returns. The magazine provides news on managed funds, mortgages, insurance, superannuation and financial planning.