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Home / New Zealand

Resist the temptation to fritter payout away

Mary Holm
By Mary Holm
Columnist·
11 Oct, 2001 03:46 AM6 mins to read

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By MARY HOLM

Q: I become redundant at the end of this month and will be receiving approximately $17,000 redundancy money, and around $40,000 from the company pension plan.

Also, my husband and I have money invested with ASB's Easyplan Balanced Fund. He has approximately $8000 and I have approximately $4000.

We are mortgage-free and have no hire purchase payments and no credit cards.

I am 55 and my husband is 53, and he earns about $36,000 a year.

We have one son in Bursary year at high school. Not sure what he is doing after that, but it could be computer engineering.

He has had a part-time job for two years and banks all his money, and his balance stands at $10,000. We may have to top up this money to cover future education costs.

We would appreciate your advice on what to do with my redundancy and pension plan moneys, which could further improve our financial standing.


A: Good on you and your son - for several reasons.

First, you've got a mortgage-free house and no other debt. As quite a lot of people unexpectedly lose their jobs in their 50s - and it's not always easy to get other well-paid work - it's a secure position to be in.

Secondly, your son is setting himself up well for tertiary studies.

Thirdly, you realise that now is a good time to assess your financial situation.

Plenty of people would just fritter away the redundancy and pension money, and have nothing to show for it 10 years later.

But, if you can manage to invest most, or all, of the $57,000, it could make a big difference to how enjoyable your retirement is.

Here's what I suggest you do:

* Don't retire yet. It must be tempting to farewell the working world. And, as I said, not everyone wants to hire people in their 50s.

But there are plenty of jobs these days. Even if you do part-time work for another 10 years, that would help lots.

* Encourage your son to pay for his own education. If he has saved $5000 a year while at high school, he might be able to continue at that pace, or even make a little more.

And, if he has to, he could take out a small student loan.

I don't think you're being mean if you don't contribute. You've already spent heaps of money and time getting him to where he is. And you are not wealthy.

If your son takes up computer engineering, it's quite likely he'll be making much more than you two before long.

Why should you go into a frugal retirement while he enjoys a high-paying career?

If that seems too extreme, perhaps you could toss a few - but only a few - thousand his way.

Put that money into term deposits that mature when your son is likely to need it.

You don't want to do anything riskier with it over just a few years.

* Put the rest of the money into retirement investments that you don't plan to touch for 10 years or more.

One good option would be to add to a balanced fund, such as the ASB one you are already in.

It has about 43 per cent of its money in world shares, 30 per cent in fixed interest, 11 per cent in New Zealand shares, and the rest in cash and property. That gives you good diversification.

Another option would be to go into a fund fully invested in shares. And, as it happens, ASB has three index funds, my favourite sort of share funds.

One invests in world shares, one in New Zealand, and one in emerging markets.

The big difference is that share funds are more volatile than balanced funds, which are watered down by their less risky investments.

Over 10 years or more, a share fund is highly likely to grow more than a balanced fund, perhaps a lot more. But the downs will be bigger, too.

Let's look at your ASB balanced fund. If you invested $1000 in August 1998, it would have grown to $1260 by August last year. But, because of the recent fall in world share prices, it would now be worth $1180.

Compare that with ASB's world index share fund. A $1000 investment in August 1998 would have grown much more, to $1570, by August last year. Since then, though, the fall has been bigger, to $1230.

But you would still be ahead in the world share fund.

While that won't always happen over a period as short as four years, it's typical of a long-term pattern.

The big question for you is: Can you cope with fairly big drops in the value of your retirement money?

If you had been unlucky enough to put $50,000 in the ASB world share fund in August last year, it would now be worth less than $40,000.

Would you hang in there, or bail out?

Bailing out is absolutely the wrong thing to do in a share or share fund investment. You've bought high and sold low. But many people panic and do it.

If you would be among them, stick with a balanced fund. But if you've got the stickability to stay with shares through the bad times, go with a share fund.

You might, for instance, put some in each of the ASB index funds - although I would favour the world fund for the bulk of your money.

Q: The latest Concise Oxford (1999) is stronger on usage than ever before.

Nevertheless, it does record that the plural of index, meaning list, should be indexes, whilst a number of weighted averages (viz. technical) should be described as indices.

Thus, according to this authority, may I humbly point out that your preference is wrong?


A: Apparently I am, strictly speaking, wrong about using "indexes".

Perhaps I should restate my stand: I dislike the use of Latin or other foreign plurals or singulars when they make the word hard to recognise.

"Indices" is an example of that. So I'm afraid I'm going to defy the Oxford. (Them's fightin' words!)

* Mary Holm is a freelance journalist and author of Investing Made Simple.

Send questions for her to 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 (preferably daytime) phone number.

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