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 April 1 2006
Q&As: Can he retire?, 40-year-old asks.
Couple about to retire wonder if their expenses will drop as they get older.
Student loan interest ends. What happens if you go overseas?
Question: I want to retire within two years. By then I should have accumulated over $500,000. I also have a mortgage-free home.
The thing is I am only 40 years old, and all the information on living in retirement seems to be calculated for 65-year-olds.
I am happy living on $500 a week, or $26,000 a year. That's a return of just over 5 per cent net.
I am planning to invest most of the money in high-yielding shares, some of which provide dividends of up to 11 per cent.
This would ensure protection of my asset base and hopefully increase it in the long term as these shares should generally increase in value.
If I can achieve an overall return of over 5 per cent, then the extra could also be added to my portfolio, as a hedge against inflation.
Do you think this is possible, or am I missing something?
Answer: It certainly is possible. And I dare say you will make many other readers envious - although most of them would probably not be prepared to live on $26,000 a year.
It's generally not a good idea to invest in shares if you plan to spend that money within the next ten years. There's too big a chance the market will dip when you have to sell, and you will lose money. Most retirees, then, should put their shorter term money into something lower risk than shares, such as high-quality corporate bonds.
However, the situation is different for you for several reasons:
* You're not planning to sell the shares, so it doesn't really matter if their value falls for a while.
* You've got a buffer between your expected return and what you hope to live on. Dividends could be reduced a fair bit and you would still receive at least your $26,000.
* You are young enough that if things don't go according to plan you can always start work again, part-time or full-time.
It's important that you invest in a wide range of shares, so that there's a good chance that if any dividends or prices fall that will be offset by rises elsewhere.
It's also important that, with most of your money in shares, you don't freak out in market downturns. Stick with your plan and the market will probably recover in due course.
Note that as you get older, you might consider living not only on dividends but also some of your capital, so that you can raise your living standard. That's when those retirement calculators might prove useful.
Meantime, good on you for getting yourself into this situation. You'll no doubt get a lot of us thinking about just how long we should work.
Question: My wife and I are just about retired, and have a reasonable nest egg, so this is not a question about how to save for retirement, but rather how to spend! I am trying to assess how much we can afford to spend each year.
Most of the advice and financial models I have seen use a starting amount of $x p.a and then inflate it by the CPI to give you in theory constant spending power.
My gut feeling is that in fact we will actually tend to spend less as we get older (I realise that decreases in "luxury" spending may well be offset by increases in health care expenses).
I haven't been able to find any research into this topic. The nearest thing is a Stats Dept table that analyses spending by age group, but that stops at "65 and older", which of course is where I want it to start! Do you have any information/opinion on the subject?
The significance of all this is that if it is OK for our real spending power to drop as we age, we could be spending much more now on fun stuff, knowing that we will still have sufficient when we are old(er) and grey(er).
Answer: I'm all for retirees getting into the fun stuff, so let's see what we can do for you.
I don't know of any other stats you could look at. But you might get some guidance from the collective wisdom of readers of this column.
About 18 months ago, someone wrote to ask how much it costs to live in retirement, and several people responded.
One letter said the couple was spending about the same before and after retirement. The pre-retirement costs of transport, work clothes and other work-related expenses were replaced by more spending on leisure and medical expenses.
Another said they got by on a lower income after retirement as they were no longer supporting children at university, and no longer saving for retirement!
Getting down to numbers, a couple with no debt, good health and a house and car in good shape said New Zealand Super alone "will allow for a reasonably comfortable retirement." Currently, NZ Super for a wife and husband who both qualify totals $20,465 a year after tax.
Another couple with a mortgage-free home get by on around $25,000 a year, including going to the opera and some overseas travel. However, they dip into their capital for health care costs and buying new cars.
And a third couple manages on about $30,000 a year, which covers buying cars and taking holidays.
Speaking of cars, several couples said they saved by owning only one car in retirement. When both spouses wanted to use it - which wasn't all that often - one cycled, took public transport or a taxi.
While all of this might be helpful, it doesn't directly address the question of how spending in your sixties compares with in your seventies, eighties and - let's go for it - nineties and beyond.
So, while we don't really need more input on retirement spending in general, perhaps some older retired people could write to tell us how their total spending has changed from one decade of their retirement to the next.
Question: I have a couple of questions with regard to the student loan scheme.
Am I right in understanding that the government has agreed to wipe debit interest from student loans from the 1st of April, as long as the participant remains in New Zealand for that financial year?
If this is correct, would it now make more sense to draw down as much of your student loan as possible while studying, (even if not required), and invest it in a high-earning interest account, shares or debentures?
Does this also mean that ex-students who are currently trying to pay off their student loans via their employers, should now make only the minimum payments required by law, and never make voluntary payments?
Because, unless I am missing something, the longer one takes to pay it off, the more inflation will eat away at the existing loan. The ex-student would now be better off looking to put any surplus from his wages into investments instead of debt repayment.
Can you please clarify whether this is correct?
Answer: Sort of, yes, yes, yes and yes. Today is a celebration day for students.
Interest on student loans "will still be charged and appear on statements," says a press release from Michael Cullen. "However, if a borrower is eligible, this interest will be written off after the end of the tax year (31 March)." The first interest write-offs will take place in April 2007.
Note that only interest charged after today will be written off. Students will still have to repay any interest charged up until now.
To be eligible for a write-off, the borrower has to be living in New Zealand for six months or more. Most eligible borrowers who then go overseas for more than six months lose eligibility from the day after they leave this country. They can later regain eligibility by living back here for six months.
Who doesn't lose eligibility by going offshore? Borrowers who are doing full-time post-graduate study; are working for the New Zealand government; are doing volunteer work; are unexpectedly delayed overseas; or live here and pay taxes here but are "absent due to employment or occupation".
On your points about investing borrowed money, many people feel this is morally wrong. I used to. But, as I've said before, with today's changes the government is offering very yummy candy and it seems unreasonable to expect students to turn it down.
So go ahead, you guys, borrow all you can and repay only the minimum - ten cents in every dollar over $16,588 a year. Meanwhile, watch your invested borrowings grow.
The only reasons I can think of for repaying your loan faster are:
* You don't like having a debt hanging over you. But does anyone think that way any more?
* Having the debt could make it harder for you to get a mortgage or other loan. But if you have been investing some or all of the borrowed money presumably you will be able to use that to repay your student loan if you need to.
Spare a thought, as you grow rich, for us poor old taxpayers who are subsidising you.
* Mary Holm's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following her advice. Send questions to email@example.com or Money Column, Business Herald, PO Box 32, Auckland. 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.