Steps and slips on the long climb

Shares have plunged, bounced back, then slipped again. No one knows what comes next, but if you’re in it for the long haul, it’s a risk worth taking

Q: Post lockdown, our family of four is a job-free household. We have two children at university and one still living at home.

My husband and I were both made redundant as a result of Covid-19. Still, we’re among the relatively lucky ones, leaving with a payout that gives us a nine-month buffer, and have nearly paid off our mortgage.

The future is uncertain but I’ve picked up some contract work and anticipate returning to the workforce fulltime within the year, while my husband will likely remain self-employed, so we’ll be on a considerably reduced income for a while.

Should we continue to pay into our KiwiSaver funds — either via a regular instalment or a lump sum from our redundancy savings? I’m 56 and in a growth fund. My husband is 61. He switched some months ago to a balanced fund. Apart from our home, KiwiSaver is our sole retirement nest egg.

I understand the value of compounding growth versus negligible interest on savings in the bank.

On the other hand, KiwiSaver funds are taking a hit from the financial downturn at the moment, and we will need to live off our savings while we’re not earning significantly. So, perhaps a delay is wiser until I’m back on a salary, for example, and qualify for matching contributions from my employer?

A: How about a two-week delay?

That’s bad luck, both of you losing your jobs so early in the downturn. But, as you say, your redundancy pay and low debt are big pluses.

Given your fairly strong financial position, I reckon each of you should keep contributing $1043 a year to KiwiSaver to get the maximum $521 government contribution.

Even though, as self-employed people, you’ll miss out on employer contributions, that government money still multiplies your contributions by 1.5. It’s worth getting.

The easiest way is to set up an automatic transfer from your bank of $87 a month. But there’s no rush. The 2019-2020 KiwiSaver year ends on June 30, and you will each have put in more than $1043 since 1 July 2019. But it would be good to set up your payments in July.

Earlier this week I was thinking that you’re a bit behind the times with your comment about KiwiSaver funds hitting a downturn. Since the sharemarket plunge from late February to late March, both the New Zealand and world markets have recovered most of their lost ground — although there was a wobble yesterday. See the graph.

It’s been an extraordinarily fast recovery, and nobody knows what lies in store, but in the long run the money you contribute in the next months is highly likely to grow — along with what you already have in KiwiSaver.

Beyond the $87 a month, though, I agree that it’s best to keep the rest of your savings accessible in case you need the money.

Despite the low interest, the best place for short-term money is in bank term deposits. To get a slightly higher rate, you could “ladder” the money, using, say, six-month deposits but setting it up so that some money matures every one or two months so you can access it at short notice.

And don’t just stick with your bank. Check interest.co.nz to get the highest rates.

Footnote to others in KiwiSaver: If you haven’t contributed $1043 since last July 1, try to do so well before June 30, to get the maximum government contribution. Even if you put in just $100, you’ll get $50 from the Government. You might as well!

Bouncing back

Q: This email is to let you know that I left my KiwiSaver growth fund alone during lockdown, and while my funds fell initially they have bounced back again, as you suggested they would. Still slightly lower now, but not by much.

I am soon to get NZ Super, and while I don’t need to use it quite yet, I am considering adding it to my KiwiSaver. Or investing it in the sharemarket. I’m interested in your opinion on these options.

A: That’s great that you left your money in your growth fund — assuming that you don’t plan to spend it for 10 years or more. It’s also great that the share markets have bounced back up soon.

As I said above, though, the recovery has been extraordinary. Assuming it continues, I worry that it’s too good for a couple of reasons:

● The many thousands in KiwiSaver who have never before been through a major share market downturn might get the idea that you just have to wait around for a month or two and it all comes right.

Sometimes it does, but sometimes it takes a year or two — maybe even three — for lost ground to be regained. That’s why I don’t recommend investing money you plan to spend in the next few years in even a balanced fund, let alone a higher-risk fund.

● We could easily see another downturn. It may have just started, or it may happen in the next few months or years, if companies do worse than

Special needs

Q: In last week’s column you suggested that the reader with a special-needs daughter put her daughter’s benefits into a KiwiSaver account where she can withdraw it before 65, as it is unlikely she will reach 65.

May I suggest that she put it into a similar non-KiwiSaver fund so that she does not have to apply for it to be withdrawn when she wants to. Gives her more flexibility.

A: Good thinking — to some extent! Last week I was too busy concentrating on the “withdrawal before 65” aspect and didn’t consider your point about access to the money, which I should have.

The advantage of being in KiwiSaver is that the daughter will receive government contributions from age 18 and, if she is employed, compulsory employer contributions. But once she starts withdrawing from the account — having “retired” as far as KiwiSaver is concerned — those incentives will stop.

So the best idea is to put enough contributions will count towards the $1043.

To find a suitable non-KiwiSaver fund, her mum can use the KiwiSaver Fund Finder on sorted.org.nz to choose a KiwiSaver fund, and then ask the provider if they have a similar one outside KiwiSaver. Most providers do.

Fixing the mortgage

Q: I’m about to fix my mortgage interest rate for another few years but I’m unsure how long I should fix it for. It feels like crystal-ball stuff. What would you recommend on time frames?

Twenty-four months is the lower interest rate, with 60 months being the longest and highest at

3.25 per cent, which is pretty good considering what they were.

Do you think there will be much change in the next few years? I’m leaning more towards fixing in the

60-month rate.

A: Sorry, but I don’t try to forecast interest rates. Too many unpredictables can affect them. But here are two approaches:

● Go with five years. That will give you certainty — a big plus in this economic environment. Then, if mortgage rates fall below 3.25 per cent during the five years, remember that you had a good deal at least during 2020.

● Make half your loan two years and half five years. Then, whatever happens, you can look back and say, “At least I got it half right.”

Which appeals more?

DIY KiwiSaver

Q: I’m paid by total employment cost — basically, the total value an employer will pay you, and then you choose how it is made up. For example, 100 per cent cash or 90 per cent cash and 10 per cent KiwiSaver.

Because it is a TEC, when you join KiwiSaver you are effectively paying the employee and employer contributions yourself.

I don’t know how this works from a personal tax perspective. Is it more tax-efficient to contribute to KiwiSaver this way — that is, via the employer? Or, if I took 100 per cent cash and made my own voluntary contributions to KiwiSaver each fortnight via online banking, would I get more, less or the same amount of money each fortnight to invest?

As long as it was not less, I think this would be better. I would have better control of and a more even distribution of contributions to my provider, as the money would not be held for up to three months by the Inland Revenue Department in a low-interest environment and applied sporadically to buy units.

A: There are minor differences — to do with tax on employer contributions and ACC — between your two options, but they’re not worth worrying about, an expert tells me.

“He is better, from an efficiency perspective, to take 100 per cent cash, go on a savings suspension and contribute what he likes direct to the KiwiSaver scheme — even just the $1043 and save everything on top of that in a non-KiwiSaver fund,” he says.

As discussed above, the $1043 will get you the maximum KiwiSaver government contribution of $521.

You’ll have to take a saving suspension each year, but that shouldn’t be difficult.

Why save the rest out of KiwiSaver? This is also discussed above — it’s an intertwined column this week! You have access to the money whenever you need it. Mind you, some people prefer to lock away their money because they don’t trust their own willpower! By the way:

● New rules expected to come into effect shortly will speed up the transfer of KiwiSaver money from Inland Revenue.

“In addition, it is proposed that interest on both employer and employee contributions begins to accrue from payday, until the contributions are forwarded to the KiwiSaver provider,” says law firm DLA Piper.

But still, pulling out of workplace contributions gives you more flexibility.

● I hope TEC — otherwise known as total remuneration — is stopped soon.

The Commission for Financial Capability has called for phasing it out in its Review of Retirement Income Policies 2019, which the Government is considering.

Supporters of TEC say it treats all employees the same, including those who can’t afford KiwiSaver. But that’s a small number. And it’s unfair for some employees to receive genuine employer contributions while others don’t.

Mary Holm, ONZM, is a freelance

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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.