Govt-funded money-go-round just not fair
Extending Government KiwiSaver contributions past the age of 65 would be a treat for the recipients — but there are better uses for public money
Q: You recently wrote about the “unfairness” of total employment cost (TEC), under which employees effectively pay their own employer contributions to KiwiSaver, and also of the need for KiwiSaver not to disadvantage various groups (for example, the unwaged).
I turn 65 in two months and at that time will have a short-term (Government) assignment for which I will be ineligible for KiwiSaver.
I have saved the minimum annual contribution to maximise the Government and employer contributions since joining in September 2007, shortly after the scheme’s inception. As I was mostly self-employed, the inputs for the most part were only my own.
In this time, in a high-growth fund, I have accumulated $45,000. This is estimated to give me $38 a week until the age of 90. I do have other savings (hence I opted for the higher-risk fund).
Given that older people such as myself have not been in the scheme for long, would it not be fairer for the Government and employer contributions to continue for those still wanting to opt in?
A: I can see an argument for continuing compulsory employer contributions to KiwiSaver beyond
65. Lots of employers — one estimate is 80 per cent — contribute anyway.
But I can think of two good arguments against continuing Government contributions past 65:
● It wouldn’t work.
First, a bit of background. Over65s have always been allowed to stay in KiwiSaver if they joined before turning 65. And since July last year, anyone over 65 can join the scheme.
That was a good change, as it gives retired people access to some useful parking places for their savings. They can invest in several funds, move their money from one to another, and withdraw the money at any time, so there’s plenty of flexibility.
But what would happen if they received $521 from the Government each year as long as they deposited $1042? They could just withdraw $1042 from their account and put it back in again! And then, when they got their $521, they could blow it on treats.
Pretty much every retired person would do this crazy money-go-round — except those with no savings. That doesn’t feel like improved fairness.
The Government could stop the music by saying over-65s couldn’t get the Government contribution unless they had never withdrawn from their KiwiSaver account. But that would also favour better-off people. Another low score on the fairness barometer.
● People over 65 already receive lots from the Government, in the form of NZ Super.
At current rates, a single person living alone gets about $22,000 a year after tax at the lowest rate, and if they live with others it’s about $20,000. A couple gets $34,000. There is also a winter energy payment of $41 or $64 a week, from May to September.
You might think that’s not much, but it adds up to a pretty big chunk of taxpayer money. It feels a bit greedy to ask for more.
KiwiSaver has treated you pretty well. Over the years, if you’ve contributed $1042 a year, your total contributions come to about $13,500. Even if you deposited quite a bit more sometimes, getting your total savings to $45,000 isn’t bad going.
Sorry, but I can think of better uses for Government money, like reducing child poverty.
Meanwhile, though, make sure you get your NZ Super from your 65th birthday. You can apply up to 12 weeks before your birthday.
Uncertain future
Q: I have had cancer treatment and am currently doing well. Statistically, I have been told that 20 per cent of people who have this cancer will be alive in five years. All my medical and counselling advice is that I should live as if I will be one of the 20 per cent who get a cure (advice I generally find very helpful).
But it does make money decisions difficult. I am 57, with a partner and a 19-year-old. I have most of my money in term deposits and some in a default KiwiSaver account.
After reading your book, I feel I should invest some money in higher-risk funds for the longer term.
But I am cautious because I may not live to get the benefit. I want to leave money to my partner and child if I die young.
If I survive, I may need a portion of my savings in the next five years, especially if I am unable to return to work (I am currently on extended leave on income protection insurance). But I have about $300,000 (a recent inheritance) that I will not need in the next five years, and could invest for a longer term.
If I die, under my will, my son cannot access inherited money until he is 25 (five years away), and I would hope that he would save the money when he gets it, although he is likely to want to buy a house at some point and he could use it for that. My partner would save any inherited money he gets from me.
I would welcome any thoughts you have.
A: Hard times for you, but I like your attitude — both your positivity and your practicality.
I suggest you work out the maximum amount you may need over the next five years and leave that in term deposits. Ladder the deposits so you have some maturing every month or two.
But there’s no reason why the rest shouldn’t go into a longer-term investment, such as a non-KiwiSaver fund, so that you, your partner or your son could withdraw it at any time.
If your son inherits from you, is he likely to buy a home in his 20s? If that’s a possibility, perhaps the money you expect to leave to him should go in a balanced fund.
But any money that seems likely to stay invested for 10 years or more could go into a growth fund, or even a fund in the riskiest “aggressive” category. It would be good if you can discuss this with your partner now so he understands the ups and downs of such a fund. Perhaps lend him my book!
I hope everything goes as well as possible for you all.
Drip, drip, drip . . .
Q: While staying with my sister at Christmas, I suggested she cash in her term life insurance policy, which she’d been paying small regular amounts into for two or three decades. It charged something like 5 per cent in fees, and was taking more than it was earning. She hadn’t realised that it was losing her money.
I helped her set up an account on InvestNow, drip feeding $6000 a month into a range of funds — 60 per cent in shares, 30 per cent in bonds and 10 per cent in property, all chosen for their low fees.
At the current rate, the drip feeding will end in January 2021. With markets potentially being all over the show for quite some time, would it be better to spread the drip feeding out longer? Perhaps till mid or late 2021?
A: Some experts say you shouldn’t drip feed at all when you’re investing a lump sum into shares or property, because you’ll probably earn more on the investment than you would in a bank account in the meantime.
But what if you invest the lot right before a market downturn? Most people prefer to reduce that risk by spreading their investment over several months. I wouldn’t do it for too long, though, especially with current pathetic bank interest rates. Drip feeding through until early next year is plenty.
And good on you for rescuing your sister from one of those terrible old life insurance policies that are real ripoffs.
Monthly or weekly?
Q: I have a regular investment direct debit set up on a monthly basis. Are there any significant advantages in increasing the frequency to weekly?
A: This is different from the lumpsum situation above. You’re gradually building up an investment, and drip feeding the same amount monthly works well. You buy more shares or units when they are cheap and fewer when they’re expensive.
If the share and bond markets tended to drastically rise or fall on a weekly basis, it might be worth setting up weekly investments. But the recent ups and downs are unusual. So if I were you I wouldn’t bother to change from monthly. I doubt it will make much difference in the long run.
Too many homes . . .
Q: I am a 57-year-old single woman who would like to remain in early retirement if possible.
I live in a small unit in Tauranga. I have an investment property in Hamilton. I built an ancillary dwelling on the rear of the property, and I had the two properties rented out and managed them myself, travelling an hour and a half each way to sort anything out.
I put the property with the two houses on the market. Just after that, Covid-19 hit and they have been without tenants ever since.
I have a $200,000 mortgage on that property and a $425,000 mortgage on the Tauranga unit.
I planned to sell the Hamilton places, and hopefully purchase another rental. I also have $130,000 in savings.
A: Unfortunate timing. Nobody knows what will happen to property prices — or the speed of sales — in the next year or so. Expert opinions vary widely.
It sounds as if you’re not getting any nibbles on your Hamilton houses. And who knows how long that will go on. Meanwhile, having the houses empty is stressful and wasteful.
I suggest you go back to square one. Take the property off the market for now, and get new tenants. You might have to accept lower rent than before.
Do tell your new tenants that you plan to put the houses back on the market in, say, November. It’s not fair otherwise. And perhaps offer to slash their rent at that point if they keep the properties tidy.
Footnote: In a first for this column, in all the years it has run, this reply is outdated even before it has been published! Just before the column deadline, I received another letter from you, as follows.
. . . but not any more
Q: I wrote to you late last month, but what a difference a day makes. When I wrote I had a rental property with two houses on it, but that has now sold.
I am essentially retired and I have a property worth about $500,000 with a $425,000 mortgage. I will have about $750,000 when the rental property settles next month and $100,000 in term deposits. I also have $45,000 in KiwiSaver.
Would I be better to buy a property to live in and rent out the property that I currently live in, or invest in a managed fund with a bank, or some other idea?
A: I was clearly too pessimistic! Congratulations on selling the property.
I’m not a big fan of investing in rental property during retirement. It’s bad enough that many retired people die with a house worth hundreds of thousands of dollars that they couldn’t spend. Do you want more tied up in rental property? In shares, bonds or managed funds you can gradually spend the money.
Also, can you be bothered, in retirement, with worries about tenants, maintenance, Government regulations and so on?
If I were you I would pay off your mortgage, and then perhaps find a financial adviser to help you make the remaining $470,000 work well for you throughout retirement. See the Advisers page on www.maryholm. com.
Or you could read my book, Rich Enough, A Laid-back Guide for Every Kiwi. Sorry to keep plugging the book, but it does have good advice on handling retirement savings!
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.
I can see an argument for continuing compulsory employer contributions to KiwiSaver beyond 65. Lots of employers — one estimate is 80 per cent — contribute anyway.