Too much moving house, too little saving?
Do most people really trade up so often that there’s little left for retirement? I don’t think so.
I'd love to hear more about the reason “why” behind some of your views. This isn't a “gotcha” question, but it is a challenge so I can better understand.
If someone moves house three times over their accumulation years, they will likely take on a bigger mortgage each time (as they acquire more house). This means if someone moves into their final home at age 45, they will have a mortgage until 75, or put in extra savings and pay it down earlier.
Assuming they clear their debt at 60, that doesn't seem sufficient time to save for retirement. It forgoes any and all compounding growth potential on your savings. I've heard you mention that mortgages should be prioritised over investing /saving, but I can't see how that view always makes sense. Only sometimes does it make sense. Could you please shed some light on this. The more maths, the better :). Thank you.
A: Not too much maths, sorry. If we pull numbers out of the air, they won’t apply to most people. And many readers’ eyes glaze over!
Anyway, I doubt if there is data on this. But if there was, I think we would find that, while many people do indeed “trade up” properties through their lives, they don’t tend to take on bigger and bigger mortgages.
Over the years, mortgages are paid down, enabling people to make larger deposits on new homes. And those who can manage it typically put extra money into reducing their mortgage faster, with an eye on getting to retirement mortgage-free — while also saving for retirement. This is often helped by rising incomes in middle age, and decreasing expenses as children leave home.
Those who can’t manage to pay their mortgage fast probably tend to just stay in the same property for decades — often perfectly content with their home.
Also, many people, once the kids have gone, move to smaller and sometimes lower-priced homes. And then, in retirement, they might move to a cheaper suburb because it’s further from the centre of a city, as they are no longer commuting, or move to a cheaper town. Such moves can free up several hundred thousand dollars for retirement.
Another thing: it’s not uncommon for mortgage repayments to be boosted by an inheritance or two.
So, all in all, I doubt if you’ll find many people taking on big mortgages in their middle age.
On your final point, I don’t think mortgage repayments should take total priority. I recommend everyone joins KiwiSaver and puts in at least $1042 a year, to get the maximum government contribution. And if you are an employee, put in at least 3 per cent of your pay to get the maximum employer contribution.
These incentives boost your return considerably. What’s more, you get diversification away from just a property, and you learn over the years about how markets go up and down, and the value of sticking with the right investment through thick and thin.
Beyond that, though, it usually improves your wealth more to pay down, say, a 6 per cent mortgage than to make an investment that probably won’t keep earning a return, after tax and fees, of 6 per cent or more. And paying down a mortgage is risk-free.
When mortgage rates were unusually low a couple of years ago, this argument was weaker, and I suggested people might prefer to put extra money into savings rather than their home loan. But usually concentrating on mortgage reduction makes most sense.
Happy homeowner
Q: It’s been a few months after my last question to you, and thank you, we ended up getting a brand new terrace house. The current housing market is still going downhill, but we’re so happy that we’ve finally had a house of our own. And surely the best time to enter the market is when you can afford it.
Now I’m facing a dilemma of paying extra off the mortgage to slash the interest, or keep that bit of extra cash and enjoy life while we can. Considering the massive inflation, a dollar now probably will be only 50 cents in the future. So is it still worth paying extra if you can for the mortgage?
A: This is a variation on the theme. But rather than asking whether you should pay extra off your mortgage or invest that money, you’re considering spending it.
First of all, I don’t think your justification — that inflation will erode the value of your money so you might as well spend it now — quite works.
If you were to put the cash under a mattress, you would be correct. And bank savings accounts pay less than current inflation — although term deposit interest is sometimes more than the CPI.
But, as explained above, if you pay down a mortgage, that’s equivalent to earning whatever the mortgage interest rate is. And these days mortgage rates are often considerably higher than inflation. So you’re still getting ahead.
Note, too, that the Reserve Bank seems to be determined to reduce inflation, so it probably will be lower soon.
None of this is to say that you shouldn’t spend some of your money on fun. Absolutely you should! Just keep it all in balance. And it’s great to hear you are enjoying your new home.
P.S. Current inflation isn’t really “massive”. In the 1970s and 80s inflation was in the high teens.
Cash isn’t king
Q: Can a business put a sign on their counter saying they are a cashless business?
Cash is still legal tender, so if I had the correct amount of cash, legally they have to accept my money?
A: Sorry, but they don’t. “A business can refuse to accept cash as payment for goods or services, though they must make sure you know in advance so you can be prepared for it,” says the Citizens Advice Bureau. “For example, during a pandemic a business might discourage cash payments from customers, to reduce the risk of infection.
“As long as they tell you in advance, a business can also charge you a fee for paying with cash.”
The CAB adds, though, that if you want to use cash to pay off a debt, the recipient is obliged to accept it.
The Reserve Bank goes into more detail. “Retailers offering essential services (such as supermarkets, pharmacies and petrol stations) should be supporting shoppers who can only pay with cash, but there is no legal requirement for them to do so.
“Shoppers who can only pay with cash are more likely to be vulnerable, young, elderly, poor, disabled or seasonal workers.
“Some businesses are balancing the different concerns by asking people to pay with contactless or card payments if possible, and then providing limited checkouts accepting cash for those who have no other way to pay.”
Shares every day
Q: What are the advantages of buying small amounts of shares daily — over weekly share purchases? A New Zealand website is now offering this service.
A: There’s never been anything to stop you from buying shares every day. But I assume you mean setting up a plan to invest a regular amount into, say, a share fund.
Whenever you drip-feed your purchases of any investment whose value fluctuates, you benefit from what’s called dollar cost averaging.
In a ridiculously simplified example, let’s say units in a share fund sometimes cost $4 and sometimes $2. And you invest $20 each week.
● When the price is $4, your $20 gets you five units.
● When the price is $2, you get 10 units.
Over the two periods, you’ve spent $40 and bought 15 units. Your average price is $40 divided by 15, which is $2.67. But the average price in the market is $3 — halfway between $4 and $2.
You’ve bought some bargains. How come?
Your $20 buys more investments when the prices are lower, and fewer when prices are up. This happens automatically — and works well when you make regular contributions to any investment with fluctuating values, such as a higher-risk KiwiSaver fund.
Okay, now to your question: would it work better with daily rather than weekly purchases? The answer has got to be yes. Prices can certainly vary considerably from day to day.
I rather doubt that daily versus weekly buying would make a huge difference, but it couldn’t hurt.
Raising KiwiSaver age
Q: Quick question on KiwiSaver: is the Government able to change the minimum age at which participants can withdraw (65)? Is there anything baked into the relevant legislation that precludes the government of the day from doing this? With talk of raising the Superannuation age, I wondered if the same would apply to KiwiSaver. I assume a government couldn’t do this, given that participants agreed to enter KiwiSaver on the basis they would be able to withdraw savings at 65?
A: The legislation actually says you can access your KiwiSaver money not at 65, but at the age of eligibility for NZ Super — which is currently 65. So if the Super age goes up, so does the KiwiSaver access age. But read on.
When we’re 65
Q: With National planning again to gradually increase the age of NZ Super eligibility to 67 if they get in, is it time for the KiwiSaver withdrawal age to be decoupled from the Super eligibility age, so it
remains at 65? I am not sure why they decided to connect the two together when KiwiSaver was introduced.
Increasing the age of KiwiSaver withdrawals to 67 will affect most people currently under 50. They will have less time to use their KiwiSaver money. And many will lose the choice to retire at 65, if they have already managed to save enough in KiwiSaver to allow this.
It is one reason many are also investing in schemes outside KiwiSaver, which allow you to withdraw your money at any time. Two years when you are older can be a very large percentage of your remaining life. Thoughts?
A: I suppose the NZ Super age and KiwiSaver withdrawal age were linked because the KiwiSaver designers figured that most people don’t retire until their Super starts flowing in, and they didn’t want people withdrawing their KiwiSaver money before retirement. The basic idea is that it is retirement savings.
But you raise some good points about how raising the KiwiSaver access age would be bad news for many people.
Life expectancy at 65 is about 19 years for men and 21 years for women. And if you have major health problems, you would probably expect a shorter retirement than that. Subtracting two years is significant.
Also, one of the worries about raising the Super age is that people who work in jobs requiring physical strength, or people with health issues, may need to retire at 65. If the Super age were raised, but these people were given access to their KiwiSaver money at 65, that could help to tide them over until their Super starts.
For everyone else, it’s hard to imagine they would squander their KiwiSaver money at 65 after saving for many years. They might, for example, use the money to pay off their mortgage, or do home maintenance — obviously good uses.
All in all, keeping the KiwiSaver access age at 65 would be one way of softening the negative effects of raising the Super age. Good thinking!
P.S. I hope you’re right that lots of people also have savings outside KiwiSaver. It’s always good to contribute enough to KiwiSaver to get the maximum government and employer contributions, as mentioned above. But beyond that, it’s a good idea to do further saving outside KiwiSaver, enabling you to withdraw the money when you want to.
Mind you, for some people, the temptation to spend savings is too great. In that case, it can work well to lock all your retirement savings into KiwiSaver.
Mary Holm, ONZM, 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 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.
None of this is to say that you shouldn’t spend some of your money on fun. Absolutely you should! Just keep it all in balance.