We celebrate 20 years – through some difficult times together.
Over the last 20 years there have been many influential events which have not only had an impact positively or negatively on our company, but also events which have seriously impacted on our clients. We have survived and flourished. In no particular order I name the top 20:

MMP

Has it really enhanced democracy or is government focused to a path of paternalism – away from personal choice and decision making? Is Government much more cautious due to multi party involvement? Is political correctness a convenient shield to bold policy?

Y2K

We wouldn’t debate the positive advancement for business of the growing IT contribution. Y2K was a heads up – is cyber-attack and individual liberty, on report. When rather than if – and at what cost? Does ‘paperless’ really mean less thought due to less consideration?

911

The day US lost its invincibility tag and many ignored the risk (Europe) or took the opportunity to reconstruct (Russia – North Korea – China) whilst US went on a social crusade of wanting to be liked, the rest of us lost the US sheriff. (Not for long if Trump becomes commander and chief – which I doubt).

GFC

When the corruption of the US investment banking system collided with the political influence of social housing and the world’s financial markets were shaken to the core. Many countries, including US and NZ continue to print money and still deflation or inflation have failed to eventuate.

Debt

Personal and government debt in New Zealand is astronomical and growing exponentially. Families and governments are no longer concerned about expenditure exceeding income. There will come a day. $407 billion bank lending 2016 in NZ – 55% is personal. As a percentage – double what it was 3 decades ago. (1.7 billion then – 223 billion now – personal debt).

Dairy Conversion

Commodity prices are historically volatile and yet the country has embarked on a single commodity product focus that is dependent on middle class growth in China and India. The banking sector must have a judgment day coming. The farmers in crisis will sell, the country must take another hit, or will milk powder prices begin to rise? Will a potential Labour government bail out the farming industry – now there’s an anachronism.

Baby Boomer Retirement

A quite extraordinary group of people started to receive their state pensions in 2011 – those born in the aftermath of World War II. The phenomenon will continue for a further 13 years. Thank you New Zealand, although Muldoon would have been paying me 5 years earlier.

Can enough millennials continue to fund this ongoing welfare for the well-off baby boomers?

Finance Company Collapse

Finance companies were well set up to provide a product and a service to the demographic change (baby boomers). Except they got too greedy and ignored risk. Many baby boomers are now a lot worse off, and have the ignominy of experiencing the lowest interest rates on their savings since I can remember. Investors need to reconsider their options.

KiwiSaver

Michael Cullen got this right, the timing and the design. The results (numbers of participants) proves the Minister had done his homework. If only more public policy could be so planned and implemented (and voluntary – apart from the employers perspective). Unlike student loans which are a ticking time bomb – free credit affects behaviour – it has – habits of debt are now entrenched.

Immigration

Whilst immigration is not a new phenomenon in our society the ‘Australian’ transformation (Kiwis returning is) and the impact of foreign students – initially for education and latterly on
work visas, has impacted. Especially in Auckland. We need immigrants if we expect to continue funding welfare at current rates. These kids are bright (they must be) our education
system has enriched them – or do they just prefer to live here?

Auckland House Prices

With burgeoning demand and the cheapest and most easily accessible finance in my 50 years involved in financial services, economics 101 says – prices will rise. They have. It’s now extending to other NZ desirable places to own property. Supply and demand is not theory – now we need the Central bank to step in to ‘control’ our commercial bank lending – and they are. It becomes a cycle of impulse and reaction.

Social Media

Is slowly and inexorably replacing main stream media and the historical means of communication – letters. The affect is most evident with the young but smart marketers in politics and business are evolving – on demand and online. So to, a community affect – some good, some not so good. Online investment trading is becoming the fastest growing ‘business’ worldwide.

Two World Cups

The country had a deserved party in 2011 and we celebrated again 4 years later. Rugby is a feel good factor for our country – long may we excel. Arise Sir Ted, the headmaster of our
rebirth. Can we do the three peat in Japan – not sure but many baby boomer rugby stalwarts will be there to see.

Tourism

John Key wanted this portfolio and his focus has proven providential. A small island(s) at the bottom of the world was once perceived as disadvantageous – no longer. No. 2 money earner – he was a foreign exchange trader after all. Perhaps Celia and John can cycle together as and when they exit politics – a sort of Contiki on Cycle replacing the French experience.

Radical Islam

Having a liberal attitude to this threat will certainly mean there is an ongoing price to pay in socialist Europe. Unfortunately the leadership of their religion and the leadership of the most
disaffected countries are seemingly focused to ideology and power as opposed to decency. Hopefully it stays north of the equator, although the benefits to NZ are obvious – but at a huge cost to the innocents and the disaffected.

China

The BRIC countries of Brazil, Russia, India and China were once ‘emerging markets’. Goldman Sachs sold billions in these capital market funds (unfortunately they also euchred the world with collateralised debt obligations). China has emerged – it is no longer reliant on trade, its home market is colossal. They will slow (and have) but the world has an emerging middle class of an unprecedented size and consumer capacity. We just want a growing share.

Christchurch/Wellington Earthquake

The cost in life, lifestyle and financial expense is astronomical and ongoing. The true cost in lost peace of mind, I don’t think will disappear in this generation. Has it made more people
consider their personal risk – I don’t think so, not from my experience. The change I do see is with the young – their ‘community’ concern is evident.

Financial Advisers Act – Regulation

Following the demise of the finance companies and strongly influenced by worldwide pressure to regulate the finance industry more comprehensively – the governments of the time, have created another burgeoning government department. The Financial Markets Authority. Compliance costs FoxPlan $100,000 per annum. I wish we could point to how our clients have benefited.

‘P’ Houses and Leaky Buildings

Trying to buy a house in Auckland or Wellington at the moment is a costly exercise. Not just because the prices are escalating due to lack of supply but because the due diligence necessary to manage the risk, get a LIM report, valuation and solicitors fees are necessary for each offer. The sales methodology of ‘tender’ is a nightmare – and a costly one at that. Just ask frustrated ‘buyers’ – willing and able to purchase – blocked by cost, compliance and a convoluted purchasing procedure.

Financial Literacy and Capability

I’m not convinced FoxPlan has made any sort of a dent in the poor financial literacy and capability in our community other than with our clients. Social issues are compounding – many of which are driven by a lack of financial control. Our intentions are laudable – but we have much to do to make my departure anything like the legacy I was hoping for, perhaps the next 20 years will be less traumatic. More like the ‘happy days’ of low inflation, cheap housing and full employment. Then again, I wake up and realise we had no microwaves, or hand held devices, banks didn’t provide housing finance, the government didn’t allow importation of cars (unless you were special) pubs closed at 6.00pm, and towns went to sleep in the weekends, you couldn’t invest in international markets and we sold all our primary produce to UK.

The next 20 years in business belongs to those that successfully provide value and service – a little like the last 20 years and completely unlike my first 20 years of life when ‘cradle to grave’ was the mantra – for which the young are now paying and the survivors are receiving.

But how can KiwiSaver help with this? As most of you are aware part of the incentive of contributing to your KiwiSaver is that a portion of it can be used for your deposit on your 1st home. I wanted to summarise some of the key points about what part of your KiwiSaver is eligible and some of the criteria that need to be met. Keep in mind this information is relevant as at the 10th of February 2016 and can be subject to change in the future.

General eligibility criteria
The recipient must:
– be a New Zealand citizen or entitled to live in New Zealand indefinitely.
– have contributed to KiwiSaver for a minimum of 3 years
– be a first home buyer – i.e. not have owned land or property in your name.
– live in the house for at least 6 months
If you are under 18, you have to call and set up your KiwiSaver through the provider not the employer
If you are under 16 all your legal guardians must give consent.
For more information click here

KiwiSaver First Home Withdrawal:
Effective of April 1st 2015 you may withdraw all funds except the initial $1000 kick-start contribution for your 1st property not an investment property.
These include:
– Employer contributions
– Employee contributions
-Voluntary contributions
– Investment earnings
– Member tax credits
As long as you have been contributing to KiwiSaver for the minimum of 3 years.
For more information click here

KiwiSaver HomeStart Grant:
You can apply for a Homestart Grant through Housing New Zealand if you have been contributing regularly to KiwiSaver for 3 years
The HomeStart Grant for buying an existing property is $1,000 for each year you have contributed with the maximum of $5,000 per person:
– 3 years = $3,000 single, $6,000 a couple/partnership
– 4 years = $4,000 single, $8,000 a couple/partnership
– 5 years = $5,000 single, $10,000 a couple/partnership
The HomeStart Grant for buying a brand new property/building a new propertyis $2,000 for each year you have contributed with the maximum of $10,000 per person.
– 3 years = $6,000 single, $12,000 a couple
– 4 years = $8,000 single, $16,000 a couple
– 5 years = $10,000 single, $20,000 a couple.
Eligibility Checklist click here
For more information click here
For FAQ’s click here
To apply online click here

Welcome Home Loans:
A Welcome Home Loan is offered by lenders, supported by Housing New Zealand, and, designed for first home buyers who can afford to make regular repayments on a home loan, but have trouble saving for a large deposit.

With a Welcome Home Loan you only need a 10 percent deposit, not a 20 percent deposit as required by most lenders.

Housing New Zealand does not issue the loan. This is done through normal lenders such as selected banks and credit unions. Housing New Zealand underwrites the loan for the lender. You will need to meet the lender’s specific lending criteria.

Income Threshold for grants and Welcome Home Loans:
Single: $80,000
2+ buyers: $120,000

House Price caps for Grants and Welcome Home Loans:
$550,000:
Auckland
$450,000:
Wellington, Queenstown, Christchurch, Selwyn District, Hamilton, Tauranga, Western Bay of Plenty, Kapiti Coast, Upper Hutt, Hutt City, Porirua, Tasman, Nelson and Waimakariri.
 $350,000:
All other areas
Criteria for Welcome Home Loans:
– Not received a grant before
have a deposit of 10% or more of the purchase price including KiwiSaver and grants.
For more information click here
For list of lenders click here

A Quick Disclaimer:
The views and opinions expressed here are not intended to be personalised advice for an individual retail client. The views and opinions are general in nature and may not be relevant to an individuals circumstances, and constitute as class advice. The view and opinions expressed are those of Ian Owen and not necessarily those of Foxplan Ltd. Nothing contained in this post is endorsed by the Financial Market’s Authority. Before making any investment, insurance or other financial decision you should consult a professional.

We are the junior brother of transmission gully – which exits at or near to Mackays crossing. By 2020 both will be complete. My Dad used to work in a garage at the bottom of Paekak Hill – before the coast road was created. He had wonderful stories of motorists experiences traversing that particular section of Highway One connecting Wellington to Kapiti, over the hill.

Each time I drive south of Auckland via motorway to Bombay and circumnavigate Hamilton I marvel at the transformation since I lived in the South Waikato through the 1970’s. The transportation and economic progress has evolved together. Now it is our turn.

As a region we have struggled since the GFC. Auckland especially has drawn away corporate and business enterprises from Wellington and its environs. The seat of government, IT, entertainment and the university has saved us, and technology will continue to drive change – Wellington needs to be grateful for that. Because the rest of us benefit.

As technology evolves at a staggering rate, stress and choke points occur just as they do in all infrastructure. Our highway transformation is an example, the airport development another. Whilst Auckland and Christchurch were the recipients of the Asian and American visitors, immigration, business and tourist – we remained the best kept inaccessible secret. Technology has its dangers (attempting to cross a pedestrian crossing with oncoming hoards on communication devices whilst listening to an iPod at the same time – or drivers attempting to hide their cellphone usage whilst waiting or approaching traffic lights).

But every few years the government policy of culture and collectivism means we get the benefits of their latest refits. Whilst those privately owned business focused to the profit motive pull our hair out as we go from servers and networks to cloud and split screens, not because we condemn progress and productivity but because we know the governing principle of Moore’s Law means there’s more to come, exponentially. The public service reacts quickly to change, it has to, to remain relevant and thus the town prospers. Technology upgrades, office fit outs, new premises, personnel development, consultants of all ilk’s – it’s a wonderful thing for our city and well may it continue. In fact a change of government often helps. They change things all over again and hire more personnel – and very soon the public service commuters can choose between taking the unit to Waikanae or driving, without the delays. We now have the retirement village development and a transport capability the envy of any Aucklander. All we need is climate change and the city will become outrageously prosperous.

Unfortunately the Wellington region suffered through the 2007 to 2015 era due to the combined effect of public service job losses, KiwiSaver (income into savings as opposed to business growth or personal expenditure) and the Global Financial Crisis. Our property prices have flat lined, if not declined, more corporates left for Auckland, and earthquakes didn’t help the commercial property market. The trickledown effect meant retail, restaurants and bars along with service industries have trodden water for some time. Government works helps, it did in the great depression and it has done so again. We just don’t need a World War to follow.

As we watch the maturing Auckland market; property, political and business with interest, we can with some comfort rejoice that our economy now has some depth, is more diversified, entrepreneurial, innovative, more productive and transparent because we have had to be. The cycle is on the up – the next decade is exciting for our region. We should re ‘Joyce’ (pardon the pun).

Image source:www.growwellington.co.nz/page/destination_wellington.aspx

“Alpha-generating” investments are the domain of active fund managers who are looking to exceed their own benchmarks (performance measures) or market benchmarks such as the S&P 500 or the NZX50. They attempt to pick stocks and time, buying/selling. The fees for the latter are greater than the former.

At FSB⁴ Financial we were disappointed by fund management performance through the early 2000’s, also disillusioned by fund manager behaviours which we felt were becoming problematic to our investors. The global financial crisis topped it off. Since 2008 we have systematically transferred our existing clients into asset class, smart-beta investing and directed most new and KiwiSaver investors into the new strategy. A philosophy focused to academic rationale, less cost and a transparent and consistent procedure – not to mention asset class mean reversion (historical long term performance).

The funds management industry is relatively new in NZ. Up to the mid 1980’s regulation constrained global share and bond trading. Stock brokers traded NZ shares, Insurance companies sold ‘Savings and Investment’ products. The Unit Trust industry emerged when international markets were opened in the 80’s and fund managers began to proliferate into portfolio design. Distribution relied predominantly upon insurance industry personnel and a slowly developing financial advisory industry with ‘investment’ advisers. But the growth of the retail funds management industry was slow and in 1987 the share market crash frightened the investing public who were tip-toeing into international and NZ share funds, direct or within managed funds. Insurance companies appointed their own funds management teams and distribution was directed through the insurance advisory force, the majority of whom didn’t know the difference between a bond or an equity and certainly didn’t understand volatility or risk. These savings and investment contracts were top heavy with fees because the only way the insurers could sell the products was to pay high commissions to their sales staff. They sold lots. Mostly personal super plans.

In time the funds management industry evolved and reasonable performances were being delivered by various investment teams around NZ. But the market being small meant the investment personnel who were any good were becoming hot property. This continues today and is one of the major inhibitors of long term investment out-performance in the NZ market. Fund managers lose their best personnel either overseas or to their competitors. Alongside the evolving funds management industry in NZ grew research houses and ratings agencies. Most have now departed from the NZ market – representation and communication emanating from Australia. The major banks in NZ purchased many of the insurance companies along with the smaller provincial NZ banks. This trend has started to reverse as boutique banks NZ emerge to provide unique products and services, but the Australian banks overall control both the NZ insurance and retail and wholesale investment markets.

The SBS bank is an exception, an example of a joint venture. A service offering to independent advisers. It offers nine portfolios ranging from a 20/80 growth/income split to a 98% growth / 2% income split. Consilium (its joint venture partner) arranges the portfolios through international fund managers Dimensional and the SBS Bank administers the compliance. FoxPlan will use this service.

When the global financial crisis hit NZ it exacerbated a market already affected by the collapse of the finance companies and the inception of KiwiSaver. The GFC was a big issue for many established investment advisers because much of their portfolio allocation into ‘income’ assets was directed through ‘high performing’ debentures. The research houses such as Morningstar were recommending more and more debentures along with the toxic ‘collateralised debt obligations’ and collateralised loans. The market fell on its face overnight. Fund managers disappeared. Research houses took a knock from which they have never really recovered, heading back to Australia along with various ratings agencies. The banks took over the market and now own the retail space through KiwiSaver. 65% of KiwiSaver funds are under bank direction. Banks also own the advisory space for investors. Most qualified financial advisers are employed by banks. The few impartial investment advisers such as FoxPlan are free to determine: a) their fund managers b) their portfolio designers c) their custodial platforms d) their investment philosophy and service offering – but this is not the norm.

FoxPlan has chosen these offerings deliberately and after much due diligence. It’s pleasing to see the emergence worldwide of similar rationale. The growth of passive and index investing, the proliferation of exchange traded funds (index investing) and the transition from active to passive funds management. A recent report out of the US shows 5 year performance (underperformance) for various countries. Canada, Europe, US, South Africa, Australia, Mexico, Chile – all ‘out performed’ by their benchmark over 80% of the time. In other words active fund managers are not consistently delivering fund outperformance. Their higher fees making for an overall worse outcome than passive funds.

Smart-beta passive investing is consistent (not affected by personnel changes) academically proven, takes advantage of market biases (such as small stock, value stock out performance) has less cost in fees and brokerage (it trades less and doesn’t pay exorbitant fund manager performance fees) is available on custodial platform (third party compliance and tax efficiencies) is transparent and diversified.

Whilst the seven years we have been aligned in this arrangement is not a seriously long time frame within an investment strategy – we and our clients have had no surprises and the service has exceeded the promises.

Our involvement in the ‘marketing’ activity of debenture providers (finance companies) was part public relations and part promotion on their part. This era remains strong in the memory because it was an awakening for our company. We had grown from a purely product focus in 1996 (Financial Service Brokers Ltd) to a more multi-faceted organisation by 2000. Personal insurance and personal superannuation had been our primary product offering. We embarked on an educational crusade because it was obvious that financial planning and advice based service would be our ‘product’ offering of the future due to the influence banks were now having. Their technological capability to promote and service products which were our former domain – at a better price.

We developed a multi-faceted offering focused to advice. Mortgages, Fire and General, Personal insurances, Investments, Superannuation and to do so with any confidence and competence we would need to be professionally qualified at a more academic level. Off to Uni for a couple of years dedicated to formal qualifications.

When the technology stock market crash occurred at the turn of the century it was too much for many NZ sharemarket investors and advisers. They went looking for less volatile investment products. A ‘safer’ haven. Two eventuated over time – fixed interest and hedge funds. Previously unrelated, but now entwined through residential mortgage backed securities. So arrived the NZ finance company era and even more disastrous the internationally infamous collateralised debt obligations and collateralised loan obligations. Both structured around mortgage debt. The international products created by US investment banks such as Lehman’s, Bear Stearns, Morgan Stanley and Goldman Sachs, made credible by ratings agencies (Standard and Poor’s, Moody’s) and marketed through commercial banks worldwide. NZ finance companies created debentures and ‘investing’ in car finance and mezzanine mortgages – far greater risks than the investing public was lead to believe.

The NZ finance company industry grew within a largely unregulated financial environment. The outcome, at least 50 finance companies fell over in NZ leaving investors (both direct investors and investors with debentures as part of managed funds portfolios) billions of dollars out of pocket. The mortgage backed securitisation dreamed up by Wall St investment bankers as a result of the Enron debacle through ‘convertible bonds’ issuance – were even more of a financial Armageddon. The global financial crisis was born, Lehman Bros bankrupted and liquidity dried up worldwide.

Prior to the GFC the management of our company (now FSB⁴ Financial) had embarked on a transition. We needed a new set of beliefs founded on a more academic rationale for investment and a new financial planning procedure focused on clients’ goals and aspirations. Whilst the collapse of finance companies in NZ and the Mortgage back securities worldwide were an enormous financial disaster, thankfully we and our clients were not overly affected. It had taken some years for us to become involved in using either debentures or CDO’s – certainly the schmoozing in Wellington had not convinced us. We could not measure the risk. On reflection I only wish we had remained true to our intuition – one dollar ‘lost’ for a client was too much. Eventually the weight of market sentiment and research house recommendations saw us relent – thankfully we chose finance companies who survived the early defaults and most clients exited without loss (early in the debacle). We learned a lesson.

1. The market experts (research houses and ratings agencies) were not full proof.
2. The NZ fund managers were not as smart as they lead us to believe.
3. The NZ market was not quite the Wild West – but we knew regulation had to follow.
4. The bond and debenture market (fixed interest) lost investors their shirts whereas share market investors only lost their shirts if they lost their nerve. Those that sat through the volatility lost nothing.

Equity markets as history had shown over numerous occasions always returned to record levels, it never lost capital when investors had diversified their securities and remained in the market.

We went looking for a philosophy which answered our questions – around ABC and D. Thankfully we found that philosophy through asset class investing. Index funds and Exchange Traded funds have become the big movers in capital markets around the world. NZ will follow.

Next week – Why.

The international celebrities remain behind closed doors and retain their demeanour (one would surmise) – the rest emerge from the stands and the lawns in front, heading back to Flinders and Southern Cross station via train. The sights vary from embarrassing to hilarious. All ages and both genders represented and mostly having a great time. Whilst the spirits are high behaviour is controlled (mostly) and the occasion non-threatening. It’s just that on the edges you see and experience a hint of things being not quite as ordered and germane. The homeless ensconced under the bridges and free ways, the beggars sleeping on footpaths outside the main stations, the gun toting police, the political turmoil exposed and extolled in the many daily papers, the omnipresent swagger from rubbish collector to bus driver, bartender to baggage man (all polite mind you) – but mostly the Michelle Payne interview. This was a young lass who had just won one of the richest thoroughbred races in the world, and she felt the need to lambast her industry.

Her ‘get stuffed’ announcement will go down in history just as she will for being the first woman jockey to win this most prestigious of horse races. Typically of her gender she was full of praise for those that have assisted her road to stardom – from Bart Cummins to Darren Weir but mostly for her beloved brother, Stevie. The Down Syndrome ninth child in the Payne brood who lives with his youngest sister and is employed as a strapper at the Weir stables in Ballarat.

Stevie and Michelle have recently purchased a block of land together, nearby to Dads property in Ballarat. Her intention is to train and agist young horses – with Stevie by her side. The mutual affection is obvious – such a story. The two young-ins of the Payne family of 10 who lost their mother when Michelle was only six months old and brother Stevie – 2. Paddy Payne deserves a medal. He kept his family together through thick and thin in the most chauvinistic and competitive of sports. Seven of the Payne children took up riding but it was the two youngest, Stevie and Michelle that delivered big time on a day at the races that I will never forget. Nor will I forget the picture of the Payne sisters arms around their little sister, all beautifully attired from top to toe. The picture we will never see is that of Dad, at home in his favoured armchair, on his own centre stage watching the race that stops two nations whilst his two little-ins took their centre stage at Flemington. His reward, the happy faces of his children.

The racing industry has two wonderfully positive attributes: in the majority the people involved live a life of positive intent – the glass predominantly half full. They celebrate success and enjoy the moment, usually with abundant generosity. Not a bad couple of life values.

Image Source: www.stuff.co.nz/Scott Barbour/Getty Images

There are three major concerns for this generation. Income, Health and Time. Each a symptom of habits and behaviours of the previous 40 years. As Baby Boomers advance towards more time and less money are there things which can be done to enhance or improve lifestyle options over the next 30 to 40 years?

Rationale

The first and most important understanding is of time. How much is left. How many years? This is a habit of thought. Attitudinal. Do the facts with regard to longevity become superceded by bias and belief. In other words, because parents or grandparents lived to the average lifestage of the day does this generation consider old age to be 80? Whilst the reality is that women outlive men statistics tell us that one partner ‘of an average couple retiring at age 60’ has a 50% chance of living a further 30 years. That creates two problems. The person who formerly controlled the ‘investment’ decisions has probably passed on (quite common in my office as more and more widows seek advice). Secondly, a 30 year retirement is a long time. Time in which the loss of purchasing power affects lifestyle in a negative way. A 5 % inflation rate doubles the cost of living after 15 years. When inflation is low, as it is today, interest rates are low. This is a double whammy for retirees. Fixed income investment yields (interest rate returns) are minimal and the cost of living for retirees is greater than 5% for basics such as: home maintenance, retirement home costs, medical care, travel (family can often be many miles away), quality food, rates and insurance.

The second issue is health and the medical care which accompanies it. Good health for some is the product of good genes and healthy habits. But not everyone is that lucky. In most families at least one member drew the short straw. For some families, height is too short for weight. Both the healthy and the unhealthy will have a price to pay to remain mobile and personally capable. The state will ultimately assist the incapable but the journey of unwellness is not pleasant (dealing with institutional welfarism, medical practitioners and community assistance groups). Nor is it inexpensive. We lucky ones may believe that ‘the state will pay’ – not the case in many instances. Lack of money usually accompanies this group due to a history of medically affected employment.

The ‘healthy’ lifestylers and physically active will usually enjoy a retirement of two halves. Depending on income – the first half (15 years) – travel, hobbies and family. The second half (15 years) – a lifestyle determined by money, wellness, mental and physical capability. The whole ‘game time’ is not inexpensive – both halves roughly equating but expenditure being allocated in different ways. Fun time – staying alive time.

Finally money. Income.

If we know there is a 50% chance that one partner of an average Kiwi couple is likely to live beyond age 90 – and we also know they are likely to experience a game of two halves – how much money/income is needed and how does it need to be invested to provide a guaranteed affordable lifestyle. Of course there are always extraordinary possibilities – good or bad, which could affect these probabilities. In the normal course of events however what are some reasonable assumptions and how might the retiring couple plan for a comfortable retirement.

A $60,000 income, net of tax will require $740,000 invested for 30 years with a 4% ‘real return’ (after tax, fees, inflation). This assumes a $20,000 inflation adjusted government super is also ongoing. That is – 40k from personal investments and 20k from the government. How many current Baby Boomers have $740,000 invested – not many. Just as an aside – the $740k will be gone after 30 years. The kids might inherit the house, unless Mum had to re mortgage it to maintain her lifestyle. For a 4% real return, money will need to be invested in growth assets (shares and property) – term deposits and bonds will not deliver the projected long term outcome (using historical data).

Of course there are no guarantees either that the next 30 years will deliver a 4% ‘real’ result – there being no guarantees with capital markets or economic and political environments.

Recommendations

• Start planning before age 50 – take advice.
• Eliminate non-deductible debt (pay the home mortgage off as quickly as possible).
• Understand income, expenditure, net worth, investment targets – measure and review annually.
• Practice healthy living.
• Communicate with the family about financial issues and estate expectations.
• Do your planning with an expectation of living 30 years in retirement.
• Think of the costs involved with retirement being a game of two halves.
• If you want more than a $60,000 income you need more than $740k invested.

The actual repayment amount must fit inside of your household budget and it must work for you. Ideally it must be a figure that pays over and above the minimum repayment of the loan.

This is so that your rate of repayment is high and not low. You don’t want to have the mortgage for a 30 year term – where you pay the same amount of interest as the amount you originally borrowed. You want your rate of repayment to mean that you pay your home loan off as fast as you can within your household budget. This will mean that you reduce your overall cost over the life time of the loan.

If it’s a 5% deposit you are putting in, the banks will want to know that the money is wholly yours and that you have saved it yourself or have held onto it for around 6 months at least. They want to know that you haven’t borrowed that money or received it as a gift recently. This is referred to as a “genuinely saved funds” .

Kiwisaver funds are considered to be “genuinely saved funds”.

If your deposit is 10% or 15% of the purchase price, then the banks will still want to know that you have saved 5% of it, but generally they are open to the other 5% coming from Housing NZ, a gift or from the sale of a car or other large asset.

If your deposit is 20% or higher, they generally don’t mind if all the funds come from a gift.

In all cases, the banks don’t like it if you have borrowed any of the money you are putting down as a deposit on a purchase. They prefer that you don’t have more debt to repay once you have the mortgage in place.

As this criteria changes from time to time, it is best to talk to your mortgage adviser about your situation.

Need to knows:

• Most banks default to 30 year mortgage term, meaning that if you only pay the minimum fortnightly or monthly repayment on the mortgage, it will take you 30 years to pay off the whole loan.
• The problem with this is that at today’s interest rates and average house prices, if you take 30 years to pay off the mortgage, the total interest over that 30 years can easily = more than the amount of the loan itself!
• EG you might take out a $300 000 mortgage and end up paying back over $300 000 just in interest alone!
• You would have effectively bought the house twice!
• But if you can just increase your repayments by $30 / week – you will have your loan paid off in 25 years.
• Your total interest would be around $60 000 less than if you took 30 years!
• So you see that it’s definitely worth it to make extra repayments to your mortgage and to pay off your mortgage sooner than 30 years. Use a good mortgage calculator to see what the difference of say an extra $30 a week would do to the total interest and total term on your mortgage!