I understand your reluctance to sell right now, given that house prices fell considerably from early 2022 to mid-2023, and haven’t gone anywhere much since then.
The trouble is, you might wait years before there’s another big gain. We don’t see the experts forecasting a house-price boom soon. Property values might even fall further.
Meanwhile, you’re clearly feeling stressed at a time of life when you don’t need that – while sitting on assets probably worth a couple of million dollars or more. You could be using some of that money to pay off your mortgage and fund travel or other treats, or to support family or others who are struggling.
Even for retirees with no debt, I recommend selling rental properties unless you really enjoy being a landlord. You get rid of potential problems with tenants and maintenance, and can diversify your investments away from just property into something you can gradually sell off, as you need the money.
In your case, with the bank hassling you, the argument is even stronger. What’s more, you would be selling just one of your three houses, so it’s hardly a radical move.
I suggest you negotiate lower rent with your tenants while the property is on the market, make a sale and get on with enjoying life.
Fund moving plan
Q: It seems that the advice for many people is to have funds likely to be needed in the next three years in term deposits or similar liquid, very low-risk funds, funds likely to be required in the next three to 10 years in balanced funds or similar, and funds not required for 10 or more years in growth funds.
Then, each year as funds are drawn from the low-risk investments, they are replenished from the balanced funds, and the balanced funds are replenished from higher-risk growth funds.
The outcome is to, effectively, move funds from high risk to low risk. Why not just do that in a single transaction rather than through multiple transactions?
A: Lots of people, including me, have recommended a strategy like this – for handling retirement savings or money being set aside for, say, a home purchase.
And if you follow it, you’re quite right – you might as well just move money directly from the higher-risk to the low-risk fund.
But there’s a problem here: you’re “forced” to sell units in the growth fund even if the markets have fallen. You’re turning a loss on paper into a real loss. Not good.
In past columns, I’ve suggested you delay that move until the markets have recovered. But let’s be more specific.
To do this best, firstly, you should:
Make the low-risk fund a PIE cash fund. These tend to have higher returns, after fees and tax, than term deposits, and give you access to cash whenever you need it. You take your spending money out of that fund.Use a medium-risk fund that invests only in bonds, preferably international as well as New Zealand bonds. Or – for the more sophisticated – invest directly in laddered bonds.Make the higher-risk fund one that invests only in shares. Many aggressive funds, in and out of KiwiSaver, are pretty much fully invested in shares.
If, instead, you use a balanced fund and a growth fund, you’ll probably find they both invest in some cash, some bonds and some shares. It’s just the proportions of each that differ – with more shares in a growth fund. This means that if there’s a bad year in the sharemarkets – or in the bond markets – it’s likely to affect both funds.
By using purely bonds and purely shares, there’s a much better chance they won’t both decline in any given year.
Once you’ve set this up, make a note of your balances in the three funds at the same time every year -perhaps early February, or on your birthday. Then review the situation each year. Questions to ask:
First, has the share fund gone up – by more than any contributions you’ve made? If yes, sell units in that fund to top up your cash fund and leave the bond fund alone, as suggested by our correspondent.
Second: if the share fund has gone down, leave it alone, and check if the bond fund has gone up. If yes, move a year’s worth of spending from the bond fund into the cash fund.
This will mean the bond fund balance will fall for a while. Don’t worry. In the following year or two – or rarely, several years later – the sharemarket will recover. At that point, top up both the cash and bond funds from the share fund, to get back to your initial allocations.
Third: what if the share and bond markets have both had a bad year? You’ve got three years of spending money in the cash fund, right? So continue your usual withdrawals, letting the cash fund total decrease.
It’s very rare for a bond fund to lose value two or three years in a row. Once it recovers – or your share fund recovers – you can top up the cash fund from either.
Fourth: now for the big “what if” – the sharemarket goes into one of its occasional crashes and takes, say, 10 years to recover? Leave your share fund alone for the whole time.
You have money needed for the next 10 years in your cash and bond funds. The balances of those funds will dwindle, but don’t worry. Once the sharemarket finally rallies – as it always does in the end – you can top them up.
This plan gives you the chance to adapt to falling markets. It gives you choices.
It does mean that quite often you will no longer have the initial allocation of three years in cash, seven years in bonds and the rest in shares. That’s okay.
Some finer points:
Try to set it up so you receive the interest from the bond fund and the dividends from the share fund in cash. Some providers will let you do this.
If, instead, your dividends in particular are reinvested – which is what usually happens in funds – you’re turning cash into shares, only to do the reverse at your annual review. That’s silly. Using this strategy means you can allocate less to the cash fund, because your spending money will be topped up with interest and dividends.
Instead of investing in one global share fund, you could invest in two or three regional funds – perhaps one covering the Americas, one covering Asia and the Pacific, and one covering Europe. These markets don’t all perform identically. So you can move the money from the one that has performed best in the last year.
Footnote: I realise that some readers will find this too complicated. If you want to keep things simple, put your money in bank term deposits, preferably using laddering, as often described in this column.
Do consider a cash fund instead, though. Term deposits don’t work well if you want to withdraw money unexpectedly.
And you should be aware that by sticking with low-risk investments, you run the risk of inflation – that the amount of stuff your savings will buy will decrease, because the after-tax interest doesn’t keep pace with inflation.
For teens too
Q: Our son is 11, and in recent years we have been saving $110 per fortnight in a growth fund for his potential university costs. We have $12,000 in there already.
What is the best way to manage this, knowing that we plan to start using this when he is 18? Move to a cash fund at 13?
A: Well done. It’s amazing how balances grow when you make regular contributions.
The plan in the previous Q&A sort of applies to you too – assuming you expect to spend the money over, say, three years, while your son is studying.
You haven’t got 10 years to play with, so an aggressive share fund or a share-heavy growth fund is too risky. There’s not enough time to recover from a big sharemarket plunge.
But you do have six or seven years, so it would be a pity to use only a cash fund, with its lower average returns.
I suggest you move the money to a bond fund, although you could use a balanced fund with a small percentage of shares.
Then, when you get to within three years of spending part of the money, when your son is 15, move one third of the money into a cash fund.
The following year, move half the remaining money, and a year after that, move the rest to the cash fund.
As discussed above, if the bond fund has a bad year, don’t move any that year. Catch up when it recovers.
Dividends matter
Q: Does reinvesting dividends work long-term? And are there any pitfalls?
A: Most KiwiSaver and other funds automatically reinvest dividends for you, as mentioned above. If you invest in individual shares, some companies let you reinvest. In other cases, you can save up dividends received and buy shares with them yourself.
Reinvesting dividends makes a huge difference to how fast your balance grows, particularly if you invest in New Zealand shares, and to a lesser extent Australian shares. Downunder companies tend to pay higher dividends than elsewhere. But this tends to be balanced out by smaller share price gains – perhaps because the companies keep less money to grow their business.
Our graphs show how much more a $1000 investment has grown with dividends reinvested, especially in this country.
However, as discussed above, sometimes it’s better to take your dividends as cash. This applies if you are gradually spending your savings, typically in retirement.
How a $1000 investment has grown
KiwiSaver access age
Q: Regarding NZ Super and the suggested raising of the age of eligibility, will our access to our own KiwiSaver funds also follow? Your answer will change my savings strategy. I’m 52, recently single and have about $720,000 between two funds. Calculators suggest they’ll each be worth close to a million by the time I’m 65 at my current savings rate. I would like to retire in my early sixties. I have savings to get me through to when I can access my KiwiSaver money at 65. Is our access to our own money tied to whatever age we can get NZ Super? No one I’ve asked seems to know.
A: Yes, it is. The KiwiSaver Act 2006 says: “Subject to other permitted withdrawals, a member is not permitted to withdraw amounts from their KiwiSaver scheme before the date on which the member reaches the New Zealand Superannuation qualification age.”
The permitted withdrawals, of course, are for a first home, hardship and so on.
However, I don’t think you need to change your savings strategy drastically. At the moment, no Government or would-be Government has proposed a rise in the NZ Super age.
That could well change. But if so, the adjustment is likely to be with a much-delayed starting date.
For example, in March 2017, Sir Bill English (then the Prime Minister) announced a plan – which was never made into law – to raise the NZ Super age from 65 to 67. But it wouldn’t have started until July 2037 – a full 20 years later. It would have affected only those under 45 at the time of the announcement.
I can’t imagine a Government proposing a rise in the NZ Super age that would affect people fairly close to retirement. It would lose them too many votes.
Still, if you want to be really cautious, you could divert a portion of your future savings from KiwiSaver into a similar non-KiwiSaver fund that you can readily access.
It’s best to contribute to KiwiSaver:
At least $1042 year to get the maximum from the Government.And 3% (3.5% from April) of your pay to get the maximum from your employer if you’re an employee.
But if you’re saving more than that, it shouldn’t affect your total savings to put the excess into a fund outside KiwiSaver.
Fortnightly column
From now on, this column will be published fortnightly. I’ve got books to write and other plans to keep me busy. But I still love receiving your letters and answering as many as I can in the column.
* 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.
Catch up on the debates that dominated the week by signing up to our Opinion newsletter – a weekly round-up of our best commentary.