Retirement savings: Why buying a rental property before retirement may not pay – Mary Holm

At this late stage, how can we grow our savings to supplement our NZ Super in retirement?

With the unstable state of the world, it seems risky to put the $120,000 into KiwiSaver so close to retirement.

We have an idea to buy and renovate an investment property, as we have skills and, hopefully, energy.

What investment potential and options do savings such as ours have so close to retirement? Have we left investing for a retirement income too late?

A: It’s never too late to save. And you can certainly build up your savings in five years.

The big question for you two is how much risk you want to take.

Sure, there are worries that KiwiSaver balances might fall in the next few years, but that really applies only to higher-risk KiwiSaver funds, which you can avoid.

Your choices for your $120,000 seem to be:

Put it in a low-risk KiwiSaver fund, where it will almost certainly grow a bit faster than in a bank account. But it won’t grow all that much in five years.Split up the money with, say, $40,000 in a low-risk KiwiSaver fund, with the idea that you will spend that early in your retirement. Then take somewhat more risk with the rest – in perhaps a middle-risk balanced KiwiSaver fund.

Your balance in the balanced fund (too many “balances”!) will fall sometimes, but probably not hugely and it will recover. You’re likely to end up with more for you to spend later in retirement.

Buy an investment property, with the plan of selling it early in your retirement. This is actually pretty high risk too, given that house prices have fallen in the last few years and show no signs of zooming up again in the near future.

On the other hand, if you get a doer-upper and are happy to put in the work, you might be able to boost the property value considerably, despite the sluggish housing market. There is lots written online about which renovation projects tend to be most rewarding.

Buy an investment property, planning to keep it through retirement and hoping the rent will be a source of income.

However, you will obviously need to have a mortgage. And many mortgaged landlords are finding, these days, that by the time they make mortgage payments as well as rates, insurance and maintenance, they have to put money into their rental rather than getting an income.

As I have said before, I don’t think owning a rental property is a great idea in retirement, unless you have plenty of other income. It just locks up your wealth.

The options I favour are the second one – being in more than one KiwiSaver fund – and the third one, buying a rental, doing it up and selling it.

Which of those is likely to find you wealthier at retirement time? There’s no way of knowing. It perhaps comes down to whether the idea of doing up a rental appeals to you.

For help in how to pick a KiwiSaver fund, or two, at the right risk level for you, use the KiwiSaver Calculator on sorted.org.nz.

A couple more thoughts:

Another source of retirement income for later in your retirement might be a reverse mortgage – now that your home mortgage is paid off.  See the next Q&A.While some readers might say you are rather irresponsible for not saving more by now, I applaud you – and perhaps even envy you – for being big travellers and “spenders on experiences”.

In reverse?

Q: I would be interested in knowing the difference between a reverse mortgage and a mortgage reversal.

Some time ago I inquired re mortgage reversal, but was advised it was “not available in your area at this time”.

A: Hmmm. I’ve never heard of a mortgage reversal and I can’t find any reference to one online. I suspect whoever you asked didn’t know what it is either.

You’re probably actually interested in a reverse mortgage.

You can often get one of these if you’re 60 or older and your mortgage is paid off or nearly paid off. You borrow for retirement spending against the equity you have in your home and make no repayments until you move out of the house or die.

In the meantime, interest on the loan compounds, so the balance grows – as opposed to decreasing in an ordinary mortgage – which is, I suppose, why it’s called a reverse mortgage.

I’ve written lots about reverse mortgages in this column, so I won’t repeat it all here. But below are my four “rules” about these loans:

Try not to get a reverse mortgage before 75 or 80 – to limit compounding growth of the loan.Spend most of your retirement savings first, except for emergency money.Don’t borrow a large lump sum unless you need it. You’ll pay interest while the money sits around in a bank. You can set up regular payments – and the ability to borrow more if you need to.Firstly, consider rates postponement – a sort of mini reverse mortgage – if you qualify for what your council offers. You can stop paying rates until you move out of the property. Many councils have no income or asset limit for this. Check what your council offers.

A good source for unbiased info on reverse mortgages is equityrelease.co.nz.

The same either way

Q: I have over $170,000 in KiwiSaver, but currently live in Australia, where I’m boosting my retirement savings.

My only concern is that now I’ll pay fees on both funds! Is there a solution to this?

A: Almost all KiwiSaver fees are percentages of your account balance, rather than flat amounts. If that’s also true of your Aussie fund, you haven’t got a problem.

Let’s say you have $100,000 in each account and they both charge a 1% fee. You’ll pay $1000 to each provider – a total of $2000.

If instead you had $200,000 in just one fund, the 1% fee would also be $2000.

Ethics and low fees?

Q: I try to do ethical investing, but can you do this with index funds?

If they are just tracking the S&P500, does that mean they are investing into those companies proportionally? How would I avoid, for example, Amazon or Lockheed Martin as part of my index investments?

A: Yes, there are “ethical” index funds, both in and out of KiwiSaver.

You’re right – if your fund was based simply on the S&P500, you would be investing in companies in all sorts of industries and with all sorts of practices. But there are several funds that use filters to keep out certain companies.

The best and easiest way to find them is through Mindful Money. On their website, click on “Find a fund”. This will take you through three steps to find funds that align with your values.

In the final step, you choose your risk profile, which leads to a list of the most suitable funds for you.

You can sort them by Best Fit, Past Returns or Fees. If you click on Fees, you get the funds with lowest fees first.

Because index funds are cheap to run, they will tend to be at the top. If you’re unsure if a fund is an index fund, check on the provider’s website.

Okay, you should by now have a few possibilities. How to pick from those? Still on Mindful Money, click on each fund’s name and you learn more about its investments.

To get further info on a particular fund, check it out on the Smart Investor tool on sorted.org.nz.

Considerations for couple

Q: With regard to the correspondent in your last column who asked about putting $100,000 into his wife’s KiwiSaver, one reason not to do this would be that his access to the money would be unnecessarily difficult if she died first.

Surely they would be better off putting the money in a joint investment account so that either of them has free access to the money in the event of the other’s death?

There might also be some tax advantages to sharing as many of their investments as possible, as opposed to one of them possibly moving into a higher PIR bracket if everything is in that person’s name.

A: Some good points to consider thanks – although given the couple are still contributing to the wife’s KiwiSaver account in their 80s, it doesn’t sound as if either would be in a desperate rush to withdraw money after one of them dies.

But every couple should make sure each of them has access to enough cash for several months if the other dies first. It can take a while to get money from an estate.

And you’re right about the tax considerations. That might be an issue for them.

All in the family?

Q: My wife and I are in our early 50s. I have around $250,000 in KiwiSaver and my wife around $50,000. We are both in aggressive funds, with Westpac and SuperLife respectively.

My wife has recently received a considerable inheritance, so we are looking at ensuring we have sufficient funds for our retirement while also being able to support our daughters into first homes.

Following your advice to focus on low fees first, we are looking to change providers. Simplicity currently stands out at less than half the fees of both of our providers. Amazing, as when I changed to SuperLife three years ago, they were the lowest.

My question is, while fees are important, should we stay with different providers to reduce risks and spread investments?

A: It’s interesting to watch how KiwiSaver fees have decreased over the years. And so they should have, given that funds are growing. It costs less per dollar invested as a fund grows!

I don’t think a good reason for a family to use more than one KiwiSaver provider is that there’s a risk it might collapse in a way that leaves you out of pocket.

There are many checks and balances to prevent that – perhaps the main one being that every provider has a supervisor, a separate company that ensures your money is invested where it should be.

There’s also the issue that every fund has a somewhat different investment strategy. So, if you are both in funds at the same risk level – as you two are – you can compare performances. But I wouldn’t take too much notice of that, as you will be looking at what’s already happened. The losing fund in the past may well end up the winner in the next period.

However, there is one advantage in using more than one provider: you can compare notes on the services you receive.

There are several other providers with fees at a similar level to Simplicity. So you could go with two different ones to check on their services. And if one is clearly better, you might both end up in that one.

By the way, I hope your wife’s inheritance brings her KiwiSaver balance up near yours, or past it. It’s worrying to see average balances being lower for women than men.

One more thing: if you want to help your daughters with first-home purchases, you might want to put some of the inheritance into their KiwiSaver accounts – unless you will be over 65 by the time the girls are likely to be purchasing, so you can withdraw from your own accounts.

* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a former director of the Financial Markets Authority, the Banking Ombudsman Scheme and Financial Services Complaints Ltd. 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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