Enjoy the kids now — money can wait
Young family with a home can afford to delay serious saving
Q: My partner and I are really struggling with some major financial decisions and we would appreciate your advice.
We have three young children, and I have only been working on and off casually while having them. I’m a teacher who is fairly high on the pay scale, and my partner makes a comparable wage. We both have KiwiSaver.
I was lucky enough to inherit some money and put it towards a rental house when I was 21. We also bought our home together. Recently we sold the rental to buy some land. The plan was always to get a mortgage to build a new home on the land and then keep our current home as a rental.
Recently we have been wondering if we should sell our home and rent somewhere until the new house is built. Then we wouldn’t need to get a mortgage, or we could get a smaller mortgage. It would take all immediate pressure off us: I wouldn’t have to find a permanent job and compromise on my flexibility while the kids are young; we could compromise less on our build; and we would still have money left over to invest and maybe even go on holiday.
But would we be squandering our lucky breaks for fear of having to tighten our belts for the next 10 years?
I’m torn between wanting to enjoy the kids while they’re young and wanting to help them financially when they’re young adults.
A: My vote is for you to sell your home and free yourself up to spend more time with the children.
It’s not as if you’ll be left in a bad situation. You’ll still have your home, with just a small mortgage, if any — which puts you way ahead of many young families. And given that you can earn good money, you’ll be able to get back into your career and do some serious saving once the kids get older.
Picture yourselves at 80. Can you really imagine saying, “I wish we had worked harder when the kids were young”?
Life is not all about maximising your finances.
Kickstart for kids
Q: I’m looking at opening a KiwiSaver account for my son. I just missed out on the $1000 kickstart and it has taken me this long to save $1500 to open an account for him (to match the KiwiSaver of my daughter, who did get the kickstart).
My question is: if I contribute $540 a year to each of their accounts, will the Government match that?
A: I’m afraid not, unless your children are over 18. The Government contribution starts at that age, and parents of students 18 and over might want to consider helping their young people with contributions then, so they receive the Government money.
You’ve also got a couple of other details wrong. The Government gives just 50c for every dollar you contribute, to a maximum of $521 if you contribute $1042 or more.
But I don’t want to be discouraging. It’s still good to sign up your son. When he starts working — even if it’s a part-time job as a teen — 3 per cent of his pay will go into KiwiSaver. It’s a great way to get him into the saving habit and perhaps set him up to buy a first home some time later.
The right tax rate
Q: I have just received a letter from the IRD saying that my 13-year-old son may be using an incorrect prescribed investor rate with his ASB KiwiSaver scheme. Sure enough, he is being taxed at 17.5 per cent, instead of 10.5 per cent.
Wouldn’t it be prudent of the ASB to tax minors at the lowest tax rate? I would appreciate your thoughts on this as I am guessing that I am not the only person out there that never thought to check.
A: Says an ASB spokesperson, “Unfortunately, we can’t make assumptions around which tax rates customers should be on, regardless of their age. We have to rely on investors to give us the appropriate rate.
“We know it can seem complicated to calculate this, which is why we have a tool on our website to help investors figure this out.”
She adds, “We also regularly communicate to all members encouraging them to check their prescribed investor rate (your readers should bear in mind your applicable rate may change over time — for example, as your income goes up or down).”
My tuppence worth: banks do a lot of things badly, but I don’t think it’s fair to blame them in this case. When someone joins KiwiSaver, they are asked about their tax rate, and it’s up to them — or their parents — to get that right. As the ASB says, it has a tool to help you.
Unfortunately, the prescribed investor rate, or PIR, system is a bit complicated. But it’s great that Inland Revenue is now helping people, like your son, to get their tax rate right.
Meanwhile, says the ASB, “If anyone is unsure of which rate they are on, we encourage them to get in touch with their provider.”
The art of giving
Q: I was interested in your “Message to Dads” comment on August 31.
I had a birthday luncheon and on the back of the invitation I wrote, “If you are thinking about a present, I am passionate about the NZ Bible Society. Its bank account is 03 0558 0245656 02 or I will have an offering bag available.”
This idea was in lieu of presents. The donations from my friends that I know about were over $500! Others gave directly and anonymously.
As you say in your message, we don’t need lots of last-minute shopping.
A: Or any shopping at all, when we’re buying stuff that people don’t want or need.
You’ve expanded the conversation from Father’s Day to birthdays. And it’s the same for Mother’s Day and Christmas.
It’s great to acknowledge someone’s special day — perhaps with a phone call, a snail-mailed card or a hand-made or grown gift. And there’s nothing inherently wrong with bought gifts.
I just don’t like seeing people running up credit card debt for the sake of handing over something expensive just because it looks bad if they don’t.
Interest v inflation
Q: You stated in your last column that today’s low interest rates aren’t as bad as they seem because inflation is low. Just as the OCR is a blunt tool, so is the CPI, as in the real world many costs are rising much faster than the CPI — for example, rates and insurance, including medical insurance.
In 2012/13, when I retired early, all my term deposits were returning between 4.25 and 4.7 per cent. If, for example, you had $1 million invested, you could live quite adequately on the return.
Today, 11 years on from the global financial crisis, all we can expect is about 2.75 per cent, returning $27,500 before tax on $1 million, which only just covers reasonably frugal living costs.
The Reserve Bank governor would like us to think about alternative uses for our savings, but as Brian Fallow pointed out, “finding those investments, when asset prices are as inflated as they are and floats are a rarity on New Zealand’s puny stock exchange, would not be easy”.
At some point fundamentals will prevail and losses of capital will ensue. Most pundits appear to agree that property is overvalued based on average income to property value multipliers, and shares are overvalued on current price to earnings ratios.
People have piled money into shares to try to get a better return or income stream from their funds, and others have piled cheap money into property to take advantage of any tax-free capital gains and interest deductibility.
If the fundamental ratios of P/E for shares and the income multiplier for property do ever get back into whack, then one assumes that prices will have to drop and some investors will lose money. However, in this current Alice in Wonderland world, who knows when and if this will ever happen.
Cheap money has in a way locked us into this scenario. If interest rates were to increase markedly, the fallout could be pretty dire. Meanwhile us suckers who saved are shafted.
Luckily we still have cash, so maybe a company offering state of the art security boxes might be the next big thing — better than a lumpy mattress!
PS: I did not take up your suggestion, in reply to my 2016 letter about the CPI, that to save money on haircuts I should grow a ponytail. Upon consideration I decided it would look too tragic!
A: Tragic? There are plenty of ageing rock stars sporting ponytails. Get with the action.
Still, even without haircuts, it’s true that costs for over-65s are rising a bit faster than for the average New Zealander.
Since 2008, Stats NZ has been collecting data on the cost of living for 13 different types of households. They include: beneficiaries; Ma¯ori; superannuitants; households with different expenditure levels; and households with different income levels.
Costs for superannuitants have risen 22.9 per cent over the 10 and a half years, compared with 17.3 per cent for the average household.
Stats NZ notes particularly that house and contents insurance prices have risen strongly in recent years. “Both of these impacted on superannuitant households the most, and beneficiary households least. Superannuitant households are more likely to own their own homes, while beneficiary households are more commonly renters.”
How else does superannuitants’ spending differ? While housing and then food are the biggest items for most types of households, people over 65 spend just a bit more than half the average household on housing, and about two-thirds of the average on food. They also spend considerably less on transport and interest.
This is probably because more superannuitants have mortgage-free homes, most no longer travel to work and there are probably fewer mouths to feed in their households.
It’s also true that:
● The gap between the CPI and interest rates has narrowed lately, making it harder for retired people.
● It’s never a good idea to invest money you plan to spend in the next
10 years in shares, a share fund or property. Whether we see share or property downturns soon or not, they will happen at some point. They always do, every now and then.
So things are not rosy for retired people with money in term deposits.
I don’t agree, though, that those who saved are shafted. You’re still better off than those who didn’t save.
Your example of spending the returns you make on $1m implies that you don’t spend any of the capital. That’s a rather old-fashioned attitude.
These days, most people tend to use up at least some of their savings during retirement. The kids can have the house — or what’s left in the house after a reverse mortgage. That’s a pretty good inheritance, especially given there are usually only one, two or three kids.
Mary Holm is a freelance journalist,
●
a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s 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. Letters should not exceed
200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.