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 19 March 2016
Q&As: Alternative for daughter trying to escape bad debt - pay up
- Is emphasis on total shareholder return justified?
- Inflation calculator shows what prices have risen, and what haven't
- Is this reader ready to retire?
- Struggling retiree questions wealthier reader's concerns
Money column for March 19 2016
Question: My daughter has been living in South Africa for two years. She would like to withdraw her KiwiSaver, but has bad debt here in New Zealand, including bad debt at the bank where she has her KiwiSaver.
So the question is: if she withdraws it could the bank, or the other places she owes money to, take her KiwiSaver to pay that debt?
Answer: Firstly, for the benefit of other readers, anyone who has been out of New Zealand or Australia for at least a year, and can provide proof that they plan to stay away permanently, can withdraw all their KiwiSaver money except the tax credits. They go back to the government.
So could your daughter withdraw her money and keep it?
Under the KiwiSaver Act, the bank can't take money out of your daughter's KiwiSaver account to settle debts. But once the money is withdrawn, would the bank be willing to pay it directly into a South African bank account?
If the bank insisted on parking the money in one of its own accounts, could it then claim that money to repay the debt owed to it? If we're talking about credit card debt, it very well might. At least one major bank says in its credit card conditions that it has the right to debit any other account to pay off credit card debt.
That might also apply to other types of debt. Time for your daughter to read the small print, or ask the bank directly.
At about this point you might be thinking, "Mary's not being very helpful here." And you'd be right. There's another alternative for your daughter, which I would prefer to see happening. That is for her to voluntarily use some of her KiwiSaver money to repay her debts.
That money probably includes a $1000 kick-start from all of us taxpayers, contributions from New Zealand employers, and returns earned on all those contributions. As her parent, how about encouraging her to do the honourable thing? Isn't that what parents are for?
Last weekend, Diana Clement wrote in her column how insurance fraud and tax dodging leave all the rest of us worse off by thousands of dollars a year. Bad debt is similar. Banks and other businesses simply raise their prices and interest rates to cover those costs.
Furthermore, going through life avoiding paying money you owe is not a recipe for peace and happiness. Do your daughter - and the rest of us - a favour, and encourage her to repay.
Question: I'm interested to hear your view on what seems to be a trend in recent times - the significance given to total shareholder return.
At quite a number of annual meetings and in company communications this metric has been quoted, especially in response to questions about dividends or increases in directors' fees! How valid is this emphasis given that much of the total return being referred to is unrealised or a paper gain only?
Answer: Total shareholder return is made up of dividends paid plus the gain - or loss - in the company's share price. And despite your concern, it's the only valid way to judge how good a share investment is.
Let's compare Big Divvy Co and Small Divvy Co, both making about the same in profits. Big Divvy pays out almost all its profits in dividends. It keeps only a small amount to fund its growth, and so its share price rises only slowly. Meantime, Small Divvy pays almost nothing to its shareholders, but reinvests its profits and grows fast. This is reflected in a zooming share price.
It's not clear which is the better investment. Big Divvy might suit shareholders who want income, perhaps in retirement. Small Divvy might be preferred by those who don't need income.
It sounds as if you are someone who buys and holds shares, as opposed to trading frequently, so you don't often turn paper gains into real gains. Good on you. That's usually the smarter way to invest, given the costs of trading - including tax - and the fact that frequent traders seem to make as many bad moves as good ones.
Still, you could make your gains real at any time by selling your shares. And some time someone - whether you or your heirs - will sell. The increased wealth is there for the taking.
Look at it this way: You probably wouldn't consider a rental property as just a generator of rental income. You would also hope to sell at a gain at some stage. Shares are the same.
Question: I'd just like to make the following comment on the first Q&A last week, headlined "Low-interest argument has merit."
Your scenarios of low interest rates in a period of low inflation are fine in theory, but unfortunately not all household expenses increase at the CPI inflation rate.
Having decided to retire early, half of my "needs rather than wants" private income is sourced from interest on term deposits. I budgeted on term deposit interest at 4 per cent gross, which seemed reasonable at the time as we had a rock star economy!
However, about one third of my budgeted outgoings relate to local authority rates, house, contents and motor vehicle insurance and health insurance (a necessity in my opinion). And all of these items have increased by significantly more than the 0.1 per cent CPI rate being touted. Even my $22 haircut has just increased by 13 per cent to $25, so reality rarely matches theory.
Answer: Everybody faces a slightly different rate of inflation. Last week I wrote of suggestions for a special rate for retired people, but even within that group individuals all spend differently. And perhaps you're hit harder than most.
However, I think you might be taking more notice of items whose prices rise than of the ones that don't. These days, low petrol prices have held down not just the cost of driving but of everything transported by road. Also, computers and other electronic goods seem to keep getting cheaper.
And items like clothing, cars and household goods certainly put a much smaller hole in the household budget than they did a couple of decades ago.
The inflation calculator on the Reserve Bank's website, www.rbnz.govt.nz, tells us that goods and services costing $100 at the start of this century now cost $142. Meanwhile wages have risen from $100 to $165.
But if we break it down, housing has been by far the most inflated sector, with $100 worth of house rising to $293. Food has risen slightly faster than other goods and services, from $100 to $146. Transport is slightly slower, rising to $132. And clothing has barely changed, from $100 to $102.
Perhaps you should skip the haircuts, grow a ponytail, and buy more clothes!
Have a play with the inflation calculator, which is near the top right corner of the Reserve Bank's home page. The data goes back as far as 1862, although the quality of that old data is a bit dodgy. But you'll learn fascinating stuff, such as what the "princely sum of $200 a year" that your grandfather earned would be worth today.
Question: Am I retiring too soon? Your correspondents last week in their mid 70s wanting to increase their nest egg of $750,000 gave me pause for thought.
I am 62, and through a combination of good fortune and hard work have savings of $625,000 in KiwiSaver, cash and term deposits and an investment portfolio. I have no mortgage on my well maintained house, no financially dependent children, and my car and health are currently in good shape.
I don't enjoy my work any more and would like to retire. I have many interests including grandchildren to keep me busy. I live comfortably on $25,000 net a year, so my nest egg would last me 25 years, and with a bit of interest and superannuation from age 65 even longer.
I don't mind not leaving any cash when I die, as my house is worth nearly a million in Auckland's current crazy climate. Do you think I'm doing the right thing?
Answer: Definitely. The deciding factor is that you're no longer enjoying your job. And it seems that you have plenty of other things to do with your time.
You can also tick the other boxes. You're well housed and "carred", and unlikely to be called on to help out family members financially.
And - of no small importance - you're financially fine, given that you are hardly the last of the big spenders.
Currently NZ Super pays at least $15,000 a year after tax - more if you're in a lower tax bracket - to single people living alone, which I assume is your situation. By the time you reach 65 it will be a little higher, as it's adjusted each year.
So after you turn 65 you'll need to spend less than $10,000 each year from your savings. That should take you through to, oh, about 120 years old - even without allowing for compounding returns on your savings.
You do need to allow a bit for inflation. But these days it's low, and in any case retired people tend to spend less as they get older. In short, you've got plenty of money.
Say "adieu" to the boss and get on with living the life you want. And if that means blowing a bit of cash every now and then on travel or other treats, do it.
Question: In reply to the "poor" man complaining about low interest rates on his nest egg of $750,000 last week: Does he have the faintest idea what that huge sum of money would mean to many people?
Try living on the pension alone, wondering how you are going to pay for a funeral if one of you passes away, or how to afford to replace an aging car, or repairs to the house etc. The list could go on.
We had a small amount of money (by comparison with his) invested in what the financial adviser told us were safe companies, and lost nearly all of it in the late '90s. If his situation is typical of thousands of retirees, who are sitting at home trying to figure out how to add to their substantial bank balances, God help us all.
Answer: Now now! I don't think it's fair to have a go at last week's correspondent. He wasn't asking for pity, just looking for ways to earn a higher return because bank deposit rates are falling. Fair enough.
Still, I can understand where you're coming from. While some people reach retirement with no savings because they've simply over-spent, others have been struck by ill health or bad luck - and can't help envying last week's couple, or for that matter the person in the last Q&A.
For you it must be particularly galling, given that you did save, but lost your money through poor advice. I feel for you.
Would it help to try to think about those worse off than yourselves, rather than those better off? Or is that comment equally galling? I hope not.
* Mary Holm is a freelance journalist, member of the Financial Markets Authority board, seminar presenter and 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 firstname.lastname@example.org 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.