Pay off debt f irst, before rates rise
Q. Should I withdraw funds from our KiwiSaver fund to pay off an overdraft we have on our home loan account or keep paying the monthly interest we are being charged for the overdraft? Many people have advised to not panic and withdraw funds when the markets are dropping. We are both 69, in fairly good health. We have an overdraft on our home loan account of $60,000, used for home renovations. We have $323,000 in KiwiSaver, and monthly expenditure of $2700 above the pension.
I asked financial adviser Liz Koh, who said whatever you decide to do, you’ll need to think about what will give you the best return into the future.
‘‘Paying off debt gives a tax-paid return of whatever your interest rate is. An overdraft has a floating interest rate and floating rates are likely to rise sharply over the next year,’’ she says.
‘‘As a general rule it’s better to pay off personal debt rather than invest. There is likely to be continued volatility in investment markets over the next year and returns may be less than what could be ‘earned’ by paying off debt. Taking a long-term view, it may be that a balanced or growth fund earns more than the overdraft interest rate but there would be significant uncertainty about that. A guaranteed after-tax return of the overdraft interest rate may be better than an uncertain return in a balanced or growth fund.’’
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Q. I will be 64 in September and will continue to work until at least 70. My KiwiSaver balance has dropped from $63,000 to $58,000 in a focused growth fund. I am not risk-averse and not panicked, I continue to buy units at a far lower price so I know the unit price will eventually correct itself and increase. I’m happy with that. I also have $9500 I will receive from another super fund in the next few days. My thoughts are that I deposit a lump, say $8000, into KiwiSaver and take advantage of a good buy into a low unit price as I have options in another 15 months if I need some funds. I need to look at another secondhand car by then and decide if costs have come down on EV, or hybrid or petrol, only I’m not keen to be paying over $30,000 for an EV. I am just
not 100% sure and I may need more thought into timing when I do this.
Are you planning to withdraw the $8000 in 15 months’ time to buy a car?
If so, Koh says that’s too short a time period to be investing in a growth fund.
‘‘It would be pure speculation with a high degree of risk to be putting the money in a growth fund now in the expectation that there will be a high return over the next 15 months. The market may fall further. Now is a good time to be ‘dollar cost averaging’ – that is, putting in a small amount each month to spread the risk of what price is paid for units. It is not possible to pick the lowest point of the market cycle until it is well and truly past, so best to be cautious and invest a little at a time.’’
David Boyle, who is the former head of investor education at Sorted, says it’s positive that you’re not overly concerned about what the markets are doing at the moment.
‘‘I suspect markets are going to be more choppy over the next few weeks, months and even a year but who knows. There are so many variables at the moment.’’
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Susan Edmunds is Stuff’s business editor. Each week, she will answer your money and personal finance questions. You can send yours to susan.edmunds@stuff.co. nz. This information is not intended as personal financial advice and should not replace advice from a professional.