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In association with Kiwibank, by Brenda Ward
In the world of investing, one size doesn’t fit all. Brenda Ward talks to financial advisers Martin Hawes and Amy Wilkes, financial educator Lisa Dudson, and Kiwibank’s Anthony Huggins about smart money strategies for each stage of your life.
Investing is a lifelong process. Are you taking the right financial steps for your stage of life?
From the child given his first pocket money to the globe-trotting retiree spending her nest-egg, there are sensible financial steps you need to take for each age and stage of your life.
Each person brings their own lifestyle, earnings and money personality to their investment. However there are two broad trends, accumulation and decumulation. That is, you spend half of your life growing your money and buying assets, and then almost as long in retirement, spending those savings.
Investment’s not just about retirement. It’s about having the financial freedom to live the life you want. So, the earlier you start, the better off you’ll be later in life, and the earlier you’ll reach financial freedom.
As a general rule, financial advisers suggest taking on more risk – ‘growth’ assets – early in life, with that level of risk declining by middle age and drastically reduced when you’re no longer working.
It doesn’t matter how little you have to spare; compound interest will help your money magically grow. As American former broker and adviser Tim Maverick says: “Start investing yesterday. Today is already too late.”
THE BEGINNERS: 0-18
Kids should get into the habit of earning and managing their own money, say our advisers. At 11, financial adviser Amy Wilkes had a monthly allowance, for clothes as well as treats. She suggests linking pocket money to chores. “If they unload the dishwasher, that might be a dollar; or to do the vacuuming, five dollars.” Financial educator and RFA Lisa Dudson agrees.
“I think money should be tied to work because that’s how the world operates.”
At their first part-time job, consider enrolling children in KiwiSaver, says financial adviser Martin Hawes. There’s no longer a kickstart grant, says Dudson, and they may have to wait to get a contribution from their employer. Bear in mind that they will be charged fees and aren’t eligible for member tax credits until they’re 18. Suggest
relatives put money into the kids’ KiwiSaver
account, instead of giving them cash,
Talk about money
From 14-18, parents should involve children in family financial decisions. Some clients take children to meetings with their financial adviser. “Giving children an awareness of money is very powerful,” says Wilkes. Adds Dudson: “Half the problem with money is that everyone is frightened of discussions about it. You don’t need to sit down and tell your kids what your wealth is, but you should be having conversations about money.”
Education in Schools
The consequences of poor choices are much higher than they were a generation ago, and we can’t afford to leave financial education to chance, says Terry Shubkin, chief executive of Young Enterprise Trust. “Research shows that financial habits are formed at a young age.” A study by Cambridge University and the UK Money Advice Service shows that adult money habits are set by the age of seven. She says financial education should be taught at all levels in schools, with good reinforcement at home, and regular conversations about managing money.
Kiwibank’s Anthony Huggins says, “Banqer is a great tool for starting conversations about money at home.
“Banqer is an online education programme that’s boosting the financial capability of New Zealand kids. The interactive virtual classroom economy is designed to help kids in years 4-8 practice their money management skills.”
For more info visit banqer.co
“Get children into a lifetime habit of saving. This way they can reap the benefits of compound interest,” says Anthony Huggins from Kiwibank. When they get their first job, suggest they put 10 per cent of it away into a long-term savings scheme. This is a good time to explain borrowing and compound interest.
He also suggests “to talk about money as you use it – both the good and the bad stuff, and guide them through a budget. Playing money games makes money feel fun.”
Financial author Martin Hawes often quotes the Stanford ‘marshmallow experiment’. It found that kids with the willpower to resist eating a marshmallow now when they were promised two later did better throughout life – at school, financially, and in Body Mass Index (BMI). Offer rewards for savings and encourage children to delay gratification.
THE EXPLORERS: 18-35
At some point in their lives, everyone is going to need a roof over their head. Start saving and buy a house as soon as you can afford it, say the experts. If you can’t afford to buy in your city of choice, Wilkes and Dudson say they see young people choosing to rent in big cities, at the same time buying a smaller investment property in another town. Wilkes suggests you calculate your living expenses, so you know what you can afford.
Kiwibank’s Huggins suggests that if you’re the type of person who prefers not to put all their savings into their mortgage you might like to consider an offset mortgage – where you offset the balance of your savings and everyday accounts against your home loan – and only pay interest on the difference.
Work hard to build your KiwiSaver account to help you get into your first home, says the experts. Dudson suggests hitting it hard, with 8 per cent at that age, which gives you a good basis of savings for your first home. If young people are both paying into their KiwiSaver account balance for retirement and saving for a home at the same time, it’s likely to take them up to five years longer to get into the property market, says Wilkes. After you buy a home, it can take a while to build your KiwiSaver account balance back up again. Make sure you are at least putting in enough to get the annual tax credit, says Dudson.
Many students wonder, should be I be paying off my student loan as soon as I can? Well no, it’s interest-free, so probably not, says financial adviser and author Martin Hawes, unless they plan to travel overseas, when they’ll have to pay interest. They could even pay off the minimum and put the rest into a savings account to earn interest. Automatic repayments are 12 per cent of everything you make over NZ$19,084.
Relationships & Babies
Not all relationships last, which is why property relationship agreements (pre-nups) are common now to protect each partner’s existing assets. “It’s about understanding who’s bringing what to the table,” says Wilkes. If there’s no pre-nup, after three years everything could be divided equally in case of a break-up.
Staying home with children is an emotional decision … but also a financial one, says Wilkes. Ask yourself how long one parent will be out of work, and calculate how much you spend each week, so there are no surprises when the baby arrives. Save for that shortfall. Each parent should make a will, saying who will care for the child if you both die.
What if you lose your phone? Crash the car? Or lose your job? Our experts recommend setting up an emergency fund or rainy day fund before you invest. Dudson suggests setting aside three to six months of your expenses. “It’s about making your life easy.”
Buy health insurance early, says Dudson. “It can be hard to get insurance once you’ve had an issue. As soon as you start a job, or a family, buy income protection insurance. You’d insure a car worth that much, so why not insure your career and earning capacity, which
is much more valuable over your lifetime?”
Kiwibank’s Huggins says, “Being young doesn’t make you invincible.
Accidents, illness and redundancy can befall people of any age, and supporting yourself if you can’t work isn’t easy.”
Huggins suggests you consider life insurance when you have a family or are dependent on your income. If you die or suddenly can’t work due to injury, illness or redundancy, life insurance can help cover your costs or provide an income for a period of time.
THE FAMILY YEARS: 35-55
Diversify your investments
Wilkes suggests you continue investing over this period of your working life. “If you put everything into the mortgage and only then start investing for retirement, it’s going to be very hard.” Look at a mix of investments, to spread your risk. They could include a rental property, an investment fund, shares, fixed interest, bonds and KiwiSaver. You can still invest in growth assets, but that depends on your comfort level with risk, says Dudson.
Hit the mortgage
It’s a matter of personal preference how you do it, but no one wants to be retiring at 65 with a mortgage. Hawes recommends paying off your mortgage as early as you can by increasing payments or paying lump sums if you have a windfall.
Kiwibank’s Huggins says just paying a small amount more than the required payment can take years off your mortgage. Beware the ‘bigger house syndrome’ and don’t keep upgrading to more expensive homes, says Hawes.
Dudson notes that if you’re repaying a 7 per cent mortgage with your after-tax money, you’d have to earn 10 per cent before tax on an investment to be better off.
Whether your child wants to go to university or not, Wilkes suggests you may want to start an education fund, to help them at that expensive stage of their lives. Some people put their funds into shares for the children to take over when they’re older.
Kiwibank’s Huggins says that putting aside a small amount each week from birth can make a big difference to the final balance.
Kids at home
When your child gets their first real job, ask them to start paying board, says Dudson. She suggests a sum of NZ$50 to NZ$150 per week. “If you don’t want to charge them, charge them anyway, but save that money for their first home deposit. It’s not about the money; it’s about the habit,” she says. If young people don’t pay board, chances are, they will just spend that money.
Update your will and insurances
All the experts suggest you review your insurances and your will regularly. When you no longer have kids at home or a mortgage, your needs are different from when you first took out cover.
Once your mortgage is paid off, your needs change, say the experts. Throw any spare money into your KiwiSaver account, invest, and cut spending, if you can. “If you wait until you’re 55 to start saving, you’re never going to make it, or it’s going to be really, really hard,” says Wilkes. “The earlier you start, the easier it can be.” Hawes says it’s not investment return that will count in the long run; it’s how much you put aside each week. To see how you're tracking towards retirement visit kiwiwealth.co.nz and try Future You, an online tool that helps you see the potential gap in your retirement income, and shows you how by making changes now, you could make a big difference in the future.
Kiwibank Limited is a distributor of the Kiwi Wealth KiwiSaver Scheme (Scheme). Kiwibank is not an issuer of the Scheme. Kiwi Wealth Limited is the Issuer and Manager of the Scheme and is a related company of Kiwibank Limited. The Product Disclosure Statement for the Scheme is available at kiwiwealth.co.nz
THE ENJOYMENT YEARS: 55+
Only retire early if you’re 100 per cent certain you’ll have enough money to live on comfortably for your lifetime, says Martin Hawes. Do the sums. “You don’t want to run out of money at 95,” he says. An American Demographics poll showed that 41 per cent of retirees found retirement a difficult adjustment. Some people find it hard to stop work, feel undervalued when they don’t work, or just love working. Others are forced to work, to make ends meet. The experts say that part-time work will help your savings last.
Do you have a hobby you can monetise? Or a room you could rent to a student? If you don’t work, try volunteering to give you a sense of purpose.
Take a retirement holiday
Investopedia.com says you wouldn’t buy a car without a test drive, so why not do a retirement trial run? Some people stop work too early, without enough resources. So, test your figures and your preconceptions. Take a month or more off work and try living in that town you always wanted to retire to, on the money you think you’ll have to live on. Do what you plan to do in retirement. Will you get bored? Will you need to save more?
Living off your investments
People are living longer, so the Commission for Financial Capability says you need to be prepared to support yourself into your 90s, at least. Many people will live on their investments for almost as many years as they’ve worked. It’s usual to invest your savings and draw down some of your capital each year.
Also, see Martin Hawes’ The Three Stages of Retirement, on page 44. Conservative levels of risk are recommended now, because you’ll have no time to recover if there’s a downturn.
If you’ve never seen a financial adviser before, now’s the time.
They may find a better return for any investments, or suggest some ideas to help you live within your income. Top-quality investment advice is crucial at this stage of your life and an investment in your future.
You may be able to afford to stay in your home in retirement, but moving into a house with fewer bedrooms and less maintenance may be a good idea. It could free up funds to
help your retirement savings. But Hawes warns that new small houses in good areas could be just as expensive as your existing home. See also The Downsize Solution on page 50. There are also reverse annuity mortgages that allow you to withdraw money gradually from your home’s value.
Doctor visits and prescription costs are big expenses for retirees. Wilkes says if you’ve been paying into a health insurance plan, now comes the pay-back. Try to keep up your policy, although it will be more expensive now.
National superannuation can be drawn from 65 now, but it’s proposed to rise to 67 for those born after January 1, 1974. It’s currently a fortnightly payment of NZ$900.20 before tax for those living alone; and NZ$681.60 before tax for each partner of a couple. This may be affected by other income you receive. If one partner receives a pension before the other, try to save that pension. Kiwibank’s Huggins suggests that post 65 years old, do not draw out all of your KiwiSaver account balance - leave it in there and continue to earn returns and draw an income.
Wills and legacies
Are you going to leave a legacy or spend all your money? The experts suggest you decide now and let the family know what you plan to do, so there are no surprises. Dudson says many people are deciding to just leave their children the house, and spend the rest. Hawes jokes many people want their last cheque, to the funeral home, to bounce.