Source: Radio New Zealand
RNZ
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No matter what mental gymnastics I do in my head and what calculators I use, I can’t work out how to maximise growth as I head towards retirement. Am I better off increasing my KiwiSaver contributions, or should I increase my mortgage repayments to minimise interest and term? It’s probably down to one’s own situation, but are there examples where one might be a better option than the other?
You’re right that it depends a lot on your own situation, and also your personality.
I talked to Rupert Carlyon, founder of Kernel KiwiSaver about this.
He points out that when you pay off your mortgage, you’re guaranteed a five percent taxfree return (or whatever interest rate you would otherwise be paying). As long as you keep paying, there is pretty much no risk that you won’t save yourself pretty significant sums of money in the long run by paying off your mortgage.
“With a KiwiSaver growth fund you may get a return of five percent to eight percent over a 10-year period,” he said.
“The returns from the market may be higher than that – though they may also be lower”.
He said you would also need to manage the downside risk. What would happen if your KiwiSaver fund did not perform as expected or lost money?
“If a member is a long term investor and plans to remain invested for at least eight to 10 years – then the probability of achieving an eight percent to 10 percent return with the KiwiSaver are higher than if they are a short term investor. If they need the money inside that time horizon – there is a significant chance of a market downturn and potentially the investment loses money – that is why the client should be in a balanced or conservative fund, and it is very unlikely that a balanced or conservative fund outperforms the mortgage over the medium term.
“If the person wants to maximise and is able to afford to take a little more risk – then potentially a KiwiSaver growth fund is the right answer. Though it depends on their time horizon and appetite for risk.”
You’ll need to weigh up how much you stand to save by paying off your home loan, what you will do once you’ve done that, and what sort of investment returns you can expect to get over the same period.
I know some people put all their money into clearing their mortgage and then plan to invest afterwards. This does reduce the amount of time you have for returns to compound, and relies also on you having the personality to actually do it.
If you can go into retirement with a mortgage-free home, that’s likely to reduce your stress quite significantly.
Can you advise me, I am getting NZ Super this year and will continue working. Which one should be secondary tax? I pay market rent and am single.
This will depend on how much you are earning from your job.
You should choose a main income tax rate for which ever income source gives you more. If you earn more than you get in NZ Super, you should have NZ Super as your secondary income. But if NZ Super will be more, you should switch your other income to a secondary tax code.
You won’t pay more tax overall for having a secondary tax code, but the addition of extra income will increase your overall tax bill which means more may need to be taxed at higher rates.
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