KiwiSaver Changes Bring New Options

KiwiSaver members now have a wider choice of contribution options. As of 1 April, you can put in 6% or 10% of your pay as well as choosing from the current options of 3%, 4% and 8%. There are good reasons why you could consider increasing your percentage contribution. If you work part time and your earnings are low, you may need to increase your contribution rate to 10% to ensure that you put at least $1,042 into your KiwiSaver account. You will then get the maximum tax credit without having to top up your account. If you are close to being able to withdraw your funds from KiwiSaver, either to buy a first home or because you are nearing the age of retirement, increasing the rate of contribution to KiwiSaver is another option for saving and investing. Unless you are likely to meet these criteria soon, it may be better to use unlocked investment products to add to your savings.

Whereas previously you could suspend KiwiSaver contributions for up to five years, the suspension period will now be one year.

For people over the age of 65, the good news is that from 1 July, 2019 you can open a KiwiSaver account and use it as a means of managing money for retirement. KiwiSaver is a great option for investing money that is not needed immediately. You can set funds aside in KiwiSaver to be used in the latter period of retirement when you might need to cover health costs, to pay for someone to take care of you, or to move into a retirement village. If you don’t have medical insurance, you can keep some funds in KiwiSaver as a backstop to cover the cost of surgery and specialist care so as to get off hospital waiting lists.

Cash Out Options for Insurance

Taking out whole of life or endowment insurance policies was a popular way of saving and investing prior to the evolution of the managed funds industry. Because the premiums were typically not inflation-adjusted, the value of the policies has not kept up with inflation. What seemed like a very high insured value decades ago, enough to retire on even, is now only enough to pay for a decent funeral and perhaps a bit more. Rather than surrender these policies and thereby losing bonuses, policy owners retain them to cover end of life costs. This means they continue paying the annual premium.

There is a way, however, to unlock the value of these old policies to provide cash for retirement. The policy can in most cases be sold to an investor, leaving the life insured unchanged. This is done through the Life Insurance Policy Exchange (www.policyexchange.co.nz). The policy holder receives more than the surrender value and the investor purchasing the policy gets a reasonable return, with the added benefit that if the insured person dies prematurely, the investor receives an earlier than expected pay-out. This has the effect of significantly increasing the rate of return.

This option to sell policies has been in place for a long time. However, there is now another twist. At a time when cashflow is more important that life cover, cash can be withdrawn from policies in partial lump sum payments over a period of time. In this case, part of the policy is sold and part is retained – perhaps to cover funeral costs. It is also possible to add additional value to the policy by increasing premiums. In this way, the policy becomes a retirement planning tool. Funds can be built up just prior to retirement and then withdrawn gradually over the course of retirement.

How Much Money Do You Need To Retire?

Ask Google how much money you need to retire and you will get a whole range of answers that will leave you none the wiser. That’s because the answer to the question is different for everybody. There really is no ‘one size fits all’ amount that will give you a comfortable lifestyle in retirement. There is a range of different factors that will influence how much you need:

What kind of lifestyle you want. Some people are quite happy living a frugal life and won’t need as much as those who live the high life.

Whether you own a debt-free home. Having to pay rent or a mortgage is a huge financial burden in retirement.

Where you live. Living in a big city costs considerably more than living in a small rural town.

The type of home you plan to live in. Maintaining an older home can be expensive while a low maintenance, fully insulated home can save you money. Downsizing your home can free up additional funds.

Your state of health and life expectancy. The longer you live the more money you will need. On the other hand, poor health adds to your financial burden

What your travel budget is. Travel is a key expense item for retirement. Frequent trips around the world will require a big budget.

How you plan to spend your time in retirement. A stay-at-home person who just likes pottering in the garden will need a lot less than someone who is involved in expensive hobbies such as golf, classic cars or motor home travel.

Really, the only way to work out how much you will need is to do a budget for your weekly living expenses in retirement and to make a list of all the ‘big ticket’ items you might need money for.

Second Timers in Retirement

Reaching retirement as a second time around couple can present a number of tricky issues. Planning how to manage money in retirement is complicated enough for any couple, but throwing relationship property issues into the mix makes it even more so.

The key issues for retiring second timers are:

  1. Should finances be managed separately or jointly and what are the implications?
  2. How should financial inequality be dealt with – that is, where one person has significantly more assets or income than the other.
  3. How can the needs of children and partners be met in a fair manner, especially on the death of one partner?

The answers to these questions depend on a number of factors, including how long the couple have been together, whether both partners have children from previous relationships, whether they have children together, and the degree of trust between them. It is essential to have legal advice so that estate planning issues can be dealt with at the outset and reviewed regularly. The outcome of this process will help guide how the key issues are addressed. For example, if partners wish to pass on their individual assets to their children on death, this may lead to assets and income being kept separate through retirement, including the share of the family home. A good estate plan will have the right balance between the interests of children and the interests of a surviving, possibly very elderly, partner. Keeping finances separate when there is inequality in assets and income, can lead to feelings of resentment, restriction and inadequacy. Sharing unequal resources requires a high level of commitment to a relationship but it can smooth the path for a much more enjoyable retirement.

Finding the answers to the key issues for second times requires good communication and professional advice.

Dealing with Market Ups and Downs

Investors in shares or diversified funds such as KiwiSaver are on a rollercoaster ride. The best strategy for dealing with volatility depends on your financial goals and whether you are still building your wealth or using it to fund your retirement.

For wealth accumulators, market volatility is more of an opportunity than a threat. Regular contributions into KiwiSaver and other investments when markets are moving up and down produce an effect called ‘dollar cost averaging’. This simply means that when you are contributing a regular fixed dollar amount, you will buy more units when prices are low and fewer units when prices are high. If you are a wealth accumulator, a market crash is an opportunity to invest more at a low price.

However, the effect of a market crash on retirees wanting to make regular withdrawals has the opposite effect. When you are taking income from your investment portfolio, you are selling units regularly, not buying. You need to have a plan in place to make sure you aren’t forced to sell investment units when prices are down. This type of investment risk is called ‘sequencing risk’. Sequencing risk occurs when you regularly withdraw amounts from your portfolio.

Retirees are much more exposed to sequencing risk in the early years of retirement. A crash in the early years when large withdrawals are being made will have a lasting effect on the performance of an investment portfolio. This risk can be lessened by setting up a laddered portfolio of bonds or term deposits in the last few years before retirement to ensure there is enough cash on hand for the first few years of retirement. Alternatively, investing a lump sum in a variable annuity will give an income for life which is guaranteed regardless of what happens in investment markets.

Proposed Capital Gains Tax

The long-awaited final report of the Tax Working Group has been released and it proposes to cast a very wide net over investment assets to be taxed for capital gain. Government may choose to accept, reject, or modify the proposals contained in the report. As it stands, capital gains tax would apply to rental properties, land, business assets and shares. The family home and personal possessions would be excluded. The tax take would be used to fund lower income tax rates, for example by raising the threshold at which the marginal tax rate changes from 10.5% to 17.5%. NZ Superannuation, which is based on average take-home pay, would slightly increase.

The report proposes that the tax be imposed on all assets owned at the date the tax changes come into effect. This means that all assets would need to be valued at that date (Valuation Day). The good news is that any capital losses would be able to be deducted against other income. Also, the ring-fencing of tax losses on rental properties which has been proposed may no longer be necessary.

For KiwiSaver it is proposed that the Employer Superannuation Contribution Tax could be refunded in full into member accounts for those earning less than $48,000 and partially for those earning between $48,000 and $70,000. Other options include increasing the annual tax credit and reducing the rate of PIE tax on the fund.

The proposed taxes would be paid when the gains are realised, with the exception of managed funds, which would be taxed annually on an accrual basis. This would create a slight timing disadvantage for managed fund investors compared with direct investors, who would only pay on the sale of an investment.

These proposals are far-reaching, complex, and likely to cause huge disruption for investors and product providers.

 

Make March a Giving Month

March should really be a month of celebration and giving. We have Thanksgiving in October or November in some countries – a day of giving thanks for the harvest of the previous year – followed by Black Friday – the biggest shopping day of the year.  We have Christmas in December – a religious celebration combined with a custom of gift giving. These events are generally focussed on immediate family and friends. March should be the time to remember others in the community who need assistance. Why March? Well, there is an obvious financial reward to those who give. Donations given to registered charities before 31 March qualify for a one third tax rebate. For every $100 you give you will get just over $33 back again.

Of course, donations can be made at any time, however the shorter the time between the donation and the receipt of the rebate, the better. Rather than waiting until March to do your giving, you can also set up regular donations through payroll giving. This is arranged by employer through the PAYE system. Your employer pays your donation to your chosen charity and claims your tax deduction at the same time, so you get an instant benefit. Giving a small amount each payday is much easier to budget for than giving one large amount annually. You don’t have to save pieces of paper or fill out the rebate form at the end of the year. Many employers are not aware of the payroll giving scheme, so if it is of interest to you, bring to their attention. More information is available here.

So make March a giving month. Either make one-off donations or set up a regular donation to the charities of your choice and be rewarded with your one third tax rebate.

The Side Hustle Strategy

It started out as a bit of a millennial thing, but now people of all ages are working on side hustles. A side hustle is side-line job or business that brings in cash in addition to your main source of income. People start side hustles for several reasons. The obvious one is to make more money so as to either spend more, save more or pay off debt. A side hustle can also be a way of trying out an idea for a business without having to give up a main job, or it may be oursimply a hobby or interest that brings in money as well as pleasure.

Before you start a side hustle it’s important to think about what it is you are trying to achieve. If the intention is to make some serious money, look at your expected return after deducting costs, so you know whether it is worth the effort and risk. If your intention is for your side hustle to eventually become your main source of income, it is even more important to do this. As a guide, look at how many other people have made a career out of it.

Balancing the time you spend on your side hustle with time spent on your main job, on your family and on enjoying life can be a struggle. Check that your side hustle is not a conflict of interest with your main job and that it fits with your employment contract.

There are lots of ways of making extra money on the side – for example blogging, coaching, tutoring, publishing ebooks, modelling, dog walking, selling things online, rubbish removal, home handyman services, crafts, party planning, photography, tour guiding, uber driving and upcycling furniture. The list is limited only by your imagination and motivation to get ahead.

Getting Your Tax Refund Just Got Easier

Every year, many people miss out on getting a tax refund simply because they hate filling out forms and dealing with Inland Revenue. Over recent years, several companies have sprung up to offer a service to such people so they can get a refund without having to do the work themselves. Often, the fees charged for what is a relatively simple process, have been a large proportion of the refund received. However, Inland Revenue has recently announced some changes which will make it much easier for people to get refunds. Companies which have been offering refund services will thankfully no longer have a reason to operate.

For the next tax year, Inland Revenue will automatically process tax refunds. If, for example, you reduce your annual income by changing from full time to part time work, you should be eligible for a chunk of cash back at the end of the tax year. People who are in employment or on a benefit such as NZ Superannuation and have other income, such as from a small business or an investment portfolio, need to fill out an IR3 form. The process for completing a tax return will be made much easier. At present, these people need to add in their income from which PAYE has been deducted, as well as their other income. This usually means requesting a personal tax summary from Inland Revenue which shows the total income from earnings and the amount of tax deducted. From the next tax year, this information will be automatically filled in to myIR accounts. Adding the additional information to the online form to show other income will also become much easier. Expenses relating to this income can also be claimed – such as business expenses or the cost of professional advice relating to an investment portfolio.

Plan to Divest Your Wealth

The interesting thing about people who accumulate significant wealth is that they are often not very good at spending it. Either that, or they have so much wealth they are unable to spend it all in their remaining life, despite their best efforts. Wealth accumulators have a different relationship with money than those who are better at spending. They value and respect money, they are not afraid of it, and their pleasure and satisfaction come not from spending money but from the feelings of success or security that wealth brings.

The peak of wealth creation usually occurs at retirement. From this point, the plan is to find ways to divest wealth before, or at, the end of life. That doesn’t necessarily mean spending it. However, wealth decumulation requires a definite change in mindset.  A lifetime of focussing on growing wealth through being careful with money, or through investing all available funds to make even more, creates a mindset which makes it difficult to spend and decumulate. As a result, many retirees end their lives having underspent their money.

The starting point for decumulation is paradoxically the end. That is, the first step is to decide how much of your wealth you plan to leave for the next generation. The difference between this amount and your peak wealth is what you plan to spend. Both numbers need to be realistically achievable. In other words, you need to plan to have enough to spend, but not so much that you will struggle to spend it. Money for the next generation can be invested for the long term and kept aside as a ‘just in case’ fund for the last stage of life, while money to be spent can be allocated to broad time frames or spent by drawing a percentage each year.