OPINION

Drip feeding

Q: I encouraged my two wage-earning sons to buy shares via an online platform with small pieces of “leftover” cash. I advised they budget for all the usual bills: electricity, food, transport,
house insurance, rates etc and allow for about $2000 a year for any maintenance surprises.

They might only have $20 a week left, but their portfolio mounts up and it is a constant teaching moment. I call it “play money” and suggest they put half into high-risk and half into conservative shares. Would you agree?

A: Sounds pretty good to me – as long as they can cope with seeing their balance plunge sometimes, which could mean a weekend’s skiing turns into just a night out.

However, I suggest they set aside more like $20,000 for emergency money, especially as it seems they own their own homes.

And if they also want to do long-term saving, it would be better if they set up fixed contributions, the day after every payday, as extra contributions to a KiwiSaver fund, or similar. This is sometimes called “pay yourself first” – the idea that saving has a higher priority than paying bills or spending.

Sorted’s Savings Calculator tells us that:

· Saving $20 a week over 20 years, with a return of 3 per cent after fees and tax in a low-risk fund, will grow to more than $28,000.

· At 6 per cent after fees and tax in a higher-risk fund, it will grow to nearly $40,000.

What if they do it for 40 years?

· At 3 per cent, it will grow to nearly $80,000.

· At 6 per cent, it will grow to more than $165,000.

Even better, gradually increase the savings amount, perhaps every birthday. Young people have the opportunity to really build up big savings.

Sell the rental!

Q: Regarding last week’s 67-year-old worried if he can retire, we don’t know how much debt he has on the $1.1 million rental property, but since he doesn’t mention it, let’s assume zero.

I have gone through a similar thought process at age 61. Leaving aside the other investments, let’s concentrate on his rental.

He gets $720 a week, or $37,440 a year. Assuming that’s taxed at 30 per cent since he’s working, he nets $26,208. After expenses and maintenance, let’s say he gets $20,000 a year.

If he sold the property and put $1.1m into a bog-standard PIE term deposit for one year (easily getting 6.1 per cent), he would make $67,100, or $48,312 after PIE tax at 28 per cent (unless you call that tax evasion!). And crucially, he would have no expenses.

He ends up with more than twice as much to spend, no hassles, and next to no risk. Add say $20,000 in NZ Super and it’s pig’s back stuff.

Yes, you then forego future capital gain, but mate, you want to retire. You’re past the accumulation phase, you’re in the making-the-most-of-it phase. Sell it.

A: You make an excellent point. These days, many rental properties bring in fairly low returns, even when there’s no mortgage.

Probably every property investor has their eye on selling at a big gain. But I wouldn’t be surprised if property price rises are considerably slower in the next decade than in the last. Even after the recent falls, our house price gains in the last 10 years were still amongst the fastest in the world.

In any case, as you say, it doesn’t make a lot of sense to not be doing what you want in your sixties while sitting on a valuable asset – especially given he can generate more income in other investments, even if interest rates fall.

By the way:

· The reader said his wife also has a rental property. It would make sense to sell both.

· No, I don’t call using a PIE fund tax evasion. The Government deliberately gives us that tax break, presumably to encourage that type of diversified investing. What I don’t like is people using a loophole in tax law to cut their taxes in a way not intended by the Government.

Property disasters

Q: I agree completely with your response last week that the person who, with his wife, lives in a retirement village and has $352,000 and two property investments has more than sufficient income-generating assets to retire.

One risk they have is that income from the properties ceases for a significant period (flood, fire, earthquake, major repairs etc) and one or both properties require a significant cash input to make them saleable. Twelve years ago, my wife and I were in a similar situation heading towards retirement. Then, one of our investment properties required $250,000 to remediate as it was a leaky building. We had just about resolved that when the apartment building where we lived also had major issues. We were able to sell that apartment but at a significant discount.

Our first exposure to leaky buildings was in the 1990s so we had taken all precautions when buying both properties and we still found ourselves incurring significant costs. One lesson I’ve taken: when investing in property, assess how resilient your finances are if there is a long period without income and if you face significant unexpected costs.

A: Another good point. Rental property can be a great investment when all goes well, but…

Paying the chauffeur

Q: I am approaching 85 and my wife is 75 and we both work part-time jobs as we find 40-hour weeks stressful.

We are trying to pay off the last $1000 owing on the three million-dollar apartments we rent out, to keep our yearly income of $2m viable.

We also have to employ a chauffeur to keep up appearances for the benefit of the neighbourhood. We live in a $10m cottage at St Heliers and have the upkeep of several offshore holiday homes.

When should we retire, as we find that the time taken in banking our money from rents, NZ Super, our current KiwiSaver investments and assorted money issues very stressful and time-consuming? We have no time to take luxury cruises to accompany our friends.

A: You poor lambs. But I’m afraid you’ll have to keep working for another 10 years at least, as you don’t have enough assets yet!

Envy or pride?

Q: Could you please consider stopping answering wealthy people’s silly questions. The chap last week wondering whether he should retire was quite ridiculous. I appreciate it’s a way for you to address a question that others may also have, but I feel the negative impact on others is not justifiable.

What do I mean? Unfortunately, we all compare ourselves with others, and those less well-off experience harm due to being on the wrong side of the wealth gap. Poorer health outcomes amongst those less well-off, purely due to the wealth gap, is a well known biopsychosocial phenomenon that I trust you’re aware of.

A: Many rich people’s letters don’t make it into the column. But every now and then there’s an interesting situation to ponder.

And while poorer people do tend to have poorer health, I doubt that reading about the wealthy adds to that harm. More often, I hear of lower-income people proud of how well they manage. One wrote to the column last week. And read on.

Lunch out

Q: I agree with the superannuitant who wrote last week saying they could live on the pension. I am a widow who lives in a retirement village and I can live on the pension.

I can have lunch out with friends and have a couple of holidays a year. While I have a small (under $100,000) investment, I don’t rely on it to live well. I sometimes draw down on it, but never below a certain amount, to pay for a holiday. I’m SKIing (spending the kids’ inheritance) as my kids call it. Anyone who can budget should be able to do so.

A: Thanks for your encouraging letter.

Another retired person reported: “I changed energy suppliers to one with a 50 per cent discount on night time use and I get the bargains at Pak’nSave. Then on my way home, I stop at Countdown to get their bargains, saving me an average of $40 to $50 a week. This week I saved $21 just on a 2kg pack of cat food alone.”

Set up Enduring Power of Attorney

Q: I’m sure the hearts of all your many readers, ourselves included, go out to the incredibly brave lady in last week’s column who is dying of cancer.

She should legally set up an enduring power of attorney as soon as she can – over her financial health and physical health. I know this sounds complex, but by employing a specialist lawyer, that lawyer will complete all the legal work.

A: You’re quite right. And this applies not only to someone in her situation, but to everyone over 18.

“An enduring power of attorney (EPA) is a legal document which sets out who can take care of your personal or financial matters if you can’t. That person is called your attorney. You can set up an enduring power of attorney through a lawyer or trustee corporation,” says the Ministry of Justice.

Sorted.org.nz points out that “as it needs to be done when people are still mentally capable, it makes sense to do it as soon as possible. People tend to think only the elderly are likely to need someone to manage their affairs, but anyone can become mentally incapable at any age”.

For more info, see tinyurl.com/NZPowerAttorney.

Maximum tax?

Q: Bravo, Mary, about the “tax dodgers”. I’ve been a chartered accountant and tax adviser for many years. Most people are fair and reasonable, others not so much.

I grumble when I see the waste most governments are guilty of, not the amount I pay. Not to mention the self-serving politicians.

Maybe there should be a cap on the maximum amount an individual taxpayer should pay. Hard to say what the amount could be. Maybe two or three million dollars? Come to think of it, maybe I’ll run for office on that policy plank!

A: Sorry, but you won’t get my vote. Under your proposal, the very wealthiest would be taxed at a lower percentage rate than the less wealthy.

Sure, you can argue that no individual gets anything like a couple of million dollars’ worth of services from the Government. But in a world in which the gap between the rich and poor is widening, I’m totally comfortable to see the highest earners’ taxes helping out the less fortunate.

On your comment about government waste, everybody will always find government spending they don’t support. But that’s a weak excuse for not contributing to the pool of funds that also pays for the services they do use.

Ripped-off kids

Q: On the 1967 change to decimal currency, as children we loved receiving one pound every Christmas from our granny to share between the three of us – six shillings and eight pence each.

After decimalisation, a pound could no longer be divided by 3 and huge arguments ensued over who would get the extra penny!

A: Oh dear! It reminds me of childhood arguments about whose glass contained the most lemonade.

* 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 or click here. 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.