A: There are two unusual elements in your letter: you’re giving up home ownership in retirement. And your friends are getting returns of 9% to 10%-plus “reasonably consistently”.
Not many New Zealanders would consider selling their home at your age. Most retirees fortunate enough to own their home like the security and the freedom to do what they please with it.
But hey, why not sell up if those issues don’t loom large for you? I often say it makes sense to sell a rental property in retirement so you can enjoy spending the money on travel and luxuries. The same could be said about your own home.
But please don’t count on returns on your money being any more than an average of around 5% after fees and tax.
I expect your friends are taking a short-term look at their returns. Sure, they may have been high in the last three years, with sharemarkets growing strongly. Or maybe they’re in other investments that have had a good run. But you don’t get returns at that level without also suffering losses some years.
If your friends haven’t seen some downturns, I suggest they look into whether they are caught up in a scam, with reported returns that are not real.
Okay, now let’s get to your question! If you feel confident running your own finances – putting money you plan to spend in the next two or three years in a low-risk fund, mid-term money in a middle-risk fund, and money for your 80s and 90s in a higher-risk fund – there’s no reason you can’t do it all yourself, through KiwiSaver.
But if you would like some guidance, find a good adviser. For help with choosing one, see www.maryholm.com/advisers on my website.
Buy home or rent in 50s?
Q: My partner and I are in our early 50s. Is it better to buy a home (we need to stay in Auckland and could afford a maximum of $750,000 for a home) or continue renting for the rest of our lives?
We are in KiwiSaver, and that, combined with other investments, would likely result in a $1 million lump sum at age 65 if we keep renting.
Using our KiwiSaver for a deposit would make a serious dent in our savings. We have been approved for a 30-year mortgage for $550,000, which we would obviously need to pay off in 15 years, not 30, due to our age.
Should we keep renting or buy? Which is the better financial option?
A: You’re sort of in the opposite situation to our previous correspondents. And I’m afraid there’s no clear answer to your question.
It depends on several factors, including how fast house prices grow from now on; how high your mortgage interest, rates, insurance and other home ownership costs would be; how much you would pay in rent; and what returns you would earn in KiwiSaver – all of which are impossible to forecast with accuracy.
Whenever there’s no clear advantage one way or the other, it’s often best to simply do what you want to do.
As mentioned above, most people would go for home ownership. But if you’re happy renting, there’s no good reason not to stick with that choice – especially as you should have plenty of retirement savings to cover rent for the rest of your lives. And if you change your minds later, you can always buy then.
Use KiwiSaver for first home?
Q: I’m looking for advice on whether to use my KiwiSaver for a first-home purchase or keep it invested for retirement. Many of my young friends are also trying to consider their options.
I’m in a stable, good-paying job and currently live with my parents, which keeps my expenses low and allows me to save.
I have about $60,000 in KiwiSaver and am considering buying a lower-cost home in South Auckland (possibly Ōtara), with the balance funded through a bank mortgage. I would live in the property and rent rooms to flatmates to help cover repayments.
My intention would be to hold the property for roughly three years before selling.
I’d appreciate your advice on:
Whether withdrawing from KiwiSaver now is the best move, or if I should save further and leave it for long-term retirement growth.The financial risks of buying with a short ownership horizon (eg tax implications, market shifts).
A: Staying with your folks has the clear advantage of reducing your cost of living. And leaving your KiwiSaver alone means your balance will be higher at retirement.
On the other hand, getting into the housing market now probably means you’ll have more wealth in housing at 65.
Just as in the last Q&A, there’s no way to forecast which move is better. So do what you prefer, which seems to be buying a house.
Having flatmates is a great way to make it more affordable – as long as you and they can negotiate the rather tricky situation of landlord and tenants living together.
On owning a house for just a while, be aware of the bright-line test. Basically, it says that if you sell a rental property within two years of buying it, your profit is taxable. Could this apply to you?
Inland Revenue addresses the issue in a publication that asks: “If a person lives in their home and rents out a room to a flatmate and then sells the land within two years of when they bought it, can they qualify for the main home exclusion to the bright-line test?”
The answer is yes, although if you have several flatmates it might not be so clear-cut. Check with an accountant. Or simply hold on to the property for more than two years – as you plan.
For other tax info on having tenants – or boarders – in your home, these are helpful:
On www.govt.nz, see the page titled “When you get a flatmate in your own house”, at tinyurl.com/FlatmatesNZ.On Inland Revenue’s website, see the page titled “Renting out a room in my main home”, at tinyurl.com/FlatmatesNZ2. This includes a link to a useful guide called “Boarders, flatmates and tenants – tax responsibilities”.
Every situation is different, of course, so I suggest you talk to an accountant anyway.
On market shifts, who knows where house prices will go from here? If you expect to buy another property once you sell the first one, you may be buying and selling in the same market, so it won’t matter much. But be aware that price movements can be quite different, even within the same city.
The way around this is to stay flexible about your timing.
Who charges tiny KiwiSaver fees?
Q: I am keen to find out where these funds with fees under 0.1% are that you mentioned recently in your column.
A: If you use the Smart Investor tool on sorted.org.nz, you can sort KiwiSaver funds and, separately, non-KiwiSaver managed funds, by “Fees, lowest first”.
There are three KiwiSaver providers and two non-KiwiSaver fund providers that offer funds with management fees of less than 0.1%. Note that I’m not saying 1%, but one-tenth of 1%. Dirt cheap! They are:
InvestNow – several aggressive funds, both KiwiSaver and non-KiwiSaver, with fees ranging from 0.03% to 0.07%.NZ Funds – KiwiSaver Balanced Fund, with zero fees.Sharesies – the US500 aggressive KiwiSaver fund, with fees of 0.09%.BNZ Term PIE (portfolio investment entity) – a non-KiwiSaver defensive fund, with zero fees. This is a bit of an outlier in this list. More on that below.
I asked the providers: “How do you make a profit on those funds?”
InvestNow’s very low-fee funds are Foundation Series Funds, that provide “exposure to popular offshore ETFs [exchange-traded funds], including to the Vanguard S&P 500 ETF, Vanguard Total World Stock ETF, Invesco Nasdaq-100 ETF, alongside ESG and dividend options”.
It’s important to note that each of these funds charges a 0.50% transaction fee each time an investor buys or sells units. “This is how we are able to cover the costs of managing the funds,” senior portfolio manager Jason Choy says.
So are you better off paying fees as your money goes in and out, but then paying a really low ongoing management fee? It works best for people staying in the funds for five years or more and not moving their money in and out.
This is partly because “annual management fees are charged on your entire fund holdings, whereas the transaction-based fees are only charged on the amount you buy or sell”, Choy says.
InvestNow also points out that “investing in the PIE structure of the funds provides additional tax efficiency compared to investing into the equivalent offshore ETF directly, due to the capped 28% tax rate of PIE funds (versus up to 39% marginal tax rate applied for direct ETF investments)”.
“For multi-year investors (which pure equity/aggressive investors should be anyway), the annual fee and tax savings compound significantly and more than offset the one-off 0.50% transaction-based fees that are levied,” Choy says.
At NZ Funds, the passively managed Balanced Fund has no management fees.
“We thought (and continue to think) that encouraging as many New Zealanders into KiwiSaver as possible is in New Zealand’s interest (and in our interest as a New Zealand-owned-and-operated investment organisation),” principal Geoff Motion says.
“We had found that a number of New Zealanders were frightened of joining KiwiSaver because of past experiences with payday loans, credit cards or other financial products whose fees they did not understand.”
NZ Funds uses sophisticated financial technology that “makes the cost of managing the fund nominal (cheaper than using an ETF)”, Motion says.
If balanced fund investors transfer to their other funds or services, they would pay a fee. But “this is not our primary motivation”, he says.
The provider adds: “We offer a range of free investment services across all our products, including free UK Pension Transfer, free Australian Super Transfer, free investment management of any service (including KiwiSaver) for under-18s, free management during parental leave and one-year free management following a hardship withdrawal.”
I should add here that other providers may well offer some similar free services. If so, let’s hear from you.
The Sharesies situation is somewhat similar to that of InvestNow.
“Our US500 fund is a passively managed index fund, so there are no portfolio managers or analysts researching or making investment decisions,” head of KiwiSaver Matt Macpherson says.
“It holds the Vanguard S&P 500 ETF, which has a 0.03% fee. The extra 0.06% covers our custody costs and things like operations of the scheme, auditing etc.
“Because the fund is unitised in US dollars and contributions arrive in NZ dollars, most members pay the 0.5% fee to convert into US dollars when buying units. However, we offer other US dollar funds too, so if you are rebalancing from another US dollar fund, you don’t need to convert currency.
“While the currency conversion fee adds to the cost, the longer you hold, the lower your costs become.”
As I said above, the BNZ Term PIE that appears in Smart Investor’s Managed Funds section, with zero fees, is odd. Several other banks also offer Term PIE investments that are not included – although probably all of them charge no management fees.
Asked how its Term PIE makes a profit, BNZ says: “We lend out money that investors deposit with BNZ and earn interest from those loans, so therefore we don’t need to charge a management fee.” That’s how banks work!
Readers should note that there are many other funds on Smart Investor that charge management fees of 1% or less – as opposed to the 0.1% we’ve looked at.
But the first thing to consider when choosing a fund, in or out of KiwiSaver, is that it’s at the right risk level for you.
* 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.
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