Kiwi Saver, Mary Holm financial writer and columnist

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Weekend Herald

Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.

NZ Herald 17 February 2018

Q&As: It's not crazy to buy when the share market falls
- Recent volatility helps KiwiSaver members decide about their fund
- KiwiSaver or term deposits for a retiree?
- Withdrawals from all managed funds are tax-free
- What happens to KiwiSaver tax credit in the year you turn 65?
- Is internet banking safe?

Question: I think I need help! I'm not a negative kind of person at all, but every time the market drops for something, I am ready to buy.
I see bargains when share prices drop. I feel like I am getting a bargain, as if the share is on sale.
Have I stumbled on the recipe for wealth or am I crazy?

Note: I only use spare cash. I am not so crazy that I would do this with my retirement savings!

Answer: A "recipe for wealth" might be overstating it, but you're far from crazy. And you've had some opportunities to cook up a feast in the last week or two.

At first glance it seems strange that most people - except you and a few others - don't react the same way to cheap shares as we do to cheap apples.

But when we buy apples - or cars or movie tickets or most other purchases - we're not hoping to sell them later at a profit. It's simply "the cheaper the better" - provided of course that we've checked out the quality.

With shares, the obvious fear is that prices will keep falling. And in a market downturn, they might fall for a while, occasionally a year or more. Some share prices might drop to zero.

But the market as a whole always recovers, and grows over the long term. Companies keep selling goods and services. Most of them make a profit most of the time, and their share prices reflect that.

So if you buy a range of shares when prices are lower than they've been lately, sooner or later you should do better than most investors, who tend to buy in rising markets.

What's more, you wouldn't be crazy to put some of your retirement savings into shares when the market drops, provided that:

- You spread your purchases across different industries, and preferably different countries. The easy way to do this is through a KiwiSaver or other share fund.

- You don't plan to spend the money for at least ten years or so. You don't want to find that, when you go to spend, the market is in a dip and you haven't got time to let it rise again.

Question: When my two sons joined KiwiSaver they approached me for guidance. At first, as the Government scheme was young, I counselled them to take conservative default schemes. But I also counselled that they review their providers and portfolio choices after one to two years, as is their privilege.

Market corrections, like the one in the last two weeks, come and go. But the recent correction in the Dow Jones index reminded me to check both sons were still in conservative KiwiSaver schemes. One was and one wasn't. He had moved one third to an aggressive equities-based fund only recently.

This raises the question of the danger of changing to a higher-risk and higher-return equities-based fund late in the piece. For people who changed or joined an aggressive KiwiSaver fund more than a year ago, a 10 per cent drop on a 20 per cent annual run-up like the Dow has seen, have not been too badly affected.

I am not suggesting that people change course, just that they use the recent events to re-evaluate their options. Do you have a view on this?

Answer: Firstly, for the benefit of others, equities basically mean shares. Some pedants say a few equities are not strictly speaking shares, but that's splitting hairs.

You're quite right that timing makes a big difference if you're investing or withdrawing a large amount of money. But it's just sheer luck.

The New Zealand, US and world share markets have all had a great run in the last nine years, since the global financial crisis ended. Not only have annual returns been almost always positive - and often high - but in recent times New Zealand monthly returns have always been positive. The market has risen eerily smoothly.

Anyone moving their KiwiSaver money into a higher-risk fund over that period will have been glad - until perhaps the last couple of weeks rattled them. But as you note, only those who made the switch very recently will have seen their balance fall below what they put into the fund.

One of the recent switcher is your son. But still, his move - with just a third of his money after all - is probably a good one. In fact, if he's not planning to spend the money on a first home in the next eight or ten years, he might want to move the rest of his money as well. Ditto his brother. Over the long term, the money is likely to grow considerably faster than in a conservative fund.

The two of them could follow the lead of today's first correspondent, and make their move now, to take advantage of somewhat lower prices - assuming they are still lower by the time this column is in the paper.

But a lower risk strategy is to move money gradually - especially if it's a large amount. Your sons might, for example, move a third of their money now, a third in six months, and the rest a year from now.

On your question about re-evaluating options, the recent volatility will give everyone in KiwiSaver a chance to see how they react to down markets.

Keep in mind that unless you are in a growth or aggressive fund - with most or all of your money in shares and perhaps property - the effects of a share price fall are watered down.

If you're in a balanced fund, with about half shares, and the market drops 10 per cent your fund will drop about 5 per cent. In a conservative fund, it might be 2 or 3 per cent. And defensive funds should be unaffected by a share market drop.

Still, if recent events have made you nervous, perhaps you should switch to a lower-risk fund. You'll probably end up with less but have a smoother ride.

If you do that, though, please promise yourself you won't switch back to a higher-risk fund when the market is growing. Frequent switchers tend to quit shares after they fall, and move back into shares after they rise. They almost always end up worse off than those who get into the right fund and stay put.

A KiwiSaver provider recently told me about a member of his scheme who complained because his return was minus 5 per cent for the year ending March 31 2017. It turned out that each month he had looked at fund returns, and moved to the fund that had performed best in the previous month. If he had stayed in his original fund, his return would have been 9.2 per cent.

Question: I am wondering if it might be wise to transfer my KiwiSaver money into a bank term deposit.

In spite of the KiwiSaver returns being higher, I wonder if this will continue. It seems ominous to me that the share market appears to be on shaky ground, and it may be that interest rates if they rise would yield a better return.

I am in a balanced KiwiSaver fund, have no immediate need for the money (though that could change), am 70 years old and have around $40,000 in the fund, which I no longer contribute to.

I would be interested in your opinion.

Answer: I suspect you're the sort of person I'm talking about above - someone who worries when the share market wobbles.

As I said, in a balanced KiwiSaver fund, the wobbles will be watered down. And if you're not expecting to spend the money for, say, five years, it will probably grow faster than in term deposits.

But if you're really concerned, go with the term deposits. Life's too short to worry about your savings.

I suggest, though, that you leave a bit in KiwiSaver, just to keep your options open. Once you're past 65, if you quit you can't rejoin.

Question: I'm in my mid-50s and currently contributing to two ASB investment balanced funds. One is a KiwiSaver account and the other enables me to access funds as needed.

In your last column you said drawdowns from KiwiSaver funds are tax-exempt income as far as NZ Superannuation is concerned. Given contributions and investment income are taxed this seems fair.

Are drawdowns from the non-KiwiSaver fund - before or after retirement age - also tax exempt? If not, should I be putting more contributions into the KiwiSaver account and less into the other?

Answer: Withdrawals from any managed fund - whether it's in KiwiSaver or not - are not taxed. It's all your money, just like money in a savings account. And none of this affects NZ Super in any way.

Stick with your plan. As long as you're putting enough in KiwiSaver to receive the maximum tax credit - and employer contributions if applicable - it's good to put extra savings in an accessible account.

Question: My wife and I are both turning 65 this financial year. We are self-employed and have been making an annual $1043 KiwiSaver contribution. That ensures the government contribution of $521 per year, which is most generous.

I cannot find out if we should make a partial or full contribution for this last year of KiwiSaver.

Answer: In the year you turn 65 - assuming you've been in KiwiSaver for at least five years - your maximum tax credit is proportionate to how much of the KiwiSaver year you are under 65.

The year runs from July 1 to June 30. So if you turn 65 at the end of January, your maximum tax credit is seven twelfths of $521. To get that you need to deposit seven twelfths of $1043, which is $609. You can make the deposit any time in the year, including after your birthday.

But the maths gets a bit trickier if your birthday is in the middle of a month. And it doesn't matter anyway. Put the whole $1043 in. Once you're 65 you can take it right back out again!

Question: Tena koe Mary, Just a small query. I happily use internet banking for all my transactions, but my friend maintains this is dangerous as it leaves my bank account open to internet hacking. Your opinion?

Answer: Tena koe e hoa. I've got a few questions for your friend. Does she or he ever ride in a car or a plane? Or swim at surf beaches? Or climb a ladder to fix something?

Using internet banking is not risk-free, but nor are many other good or convenient things in life. Just as you wear your seatbelt, swim between the flags, and make sure a ladder is placed on level ground, so you should make sure you have internet protection. It's not something I'm expert at, but you'll have savvy friends who can help you.

And don't ever give your bank PIN or password to anyone - including someone who rings or emails you saying they're from your bank. Banks don't ask for that information.

Provided you do that, you will almost certainly be fine. How many people do you know who have lost money through internet banking? It's pretty rare.

* Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and 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 Money Column, Private Bag 92198 Victoria St West, Auckland 1142. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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