Taking Care of Your Young Family

Taking Care of Your Young Family

Becoming a parent is one of life’s most exhilarating experiences and it changes things forever. Along with the joy comes the responsibility of ensuring a safe and nurturing environment for your children and the challenge of guiding them not only to be successful in life on their terms but to be good human beings.

Parenting is a serious business. There are responsibilities that come with the role of parent but unfortunately there is no instruction manual. One of the first lessons for a new parent is learning to put the needs of another person before theirs. This applies to physical, emotional and financial needs. Children are expensive and part of being a good parent is going without so children can have the necessities of life.

A study done by IRD in 2009 estimated that a middle income family with two children spent around 30% of their household income on their children. With three children, spending rises to 40% of income. So what happens when that income suddenly disappears? Tragically, just under 1800 people a year between the ages of 20 and 50 die and an even greater number become seriously ill and unable to work for a period of time. The consequences for the families of these people can be dire. There are three key ways in which parents can protect families.

  1. Make a Will. Dying without one leads to costly delays in making your financial assets such as personal bank accounts, KiwiSaver and life insurance claims available to your family.
  2. Buy life insurance, taking into account your overall budget
  3. Consider buying income protection or critical illness cover, especially if you are on a high income.

Your future income is your biggest financial asset. Make sure you protect it, for the sake of your family.

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Set Your Happy Goals

Set Your Happy Goals

It’s that time of year again, when we start with what feels like a clean slate; the whole year before us and the prospect of good fortune ahead. The pace of life is much slower during the holiday period, giving us time to reflect and think about what is important to us. It is as if we are all being given another chance to get things right. It’s the same chance we had this time last year, and every year before that. So why don’t things go according to plan? Despite the best intentions, life takes over. We get busy, and in the process of keeping up with the business of life, we let go of the great aspirations we had at the start of the year.

The key to being able to keep on track is to think about your ‘why’. The ultimate human goal is happiness. Every person finds happiness in different ways, and once you understand what truly makes you happy, you will find the motivation to succeed at your goals. Billionaire Richard Branson had it right when he said “Most people would assume my business success and the wealth that comes with it have brought me happiness. But I know I am successful, wealth and connected because I am happy”. Branson asks all his employees “What is your happy mantra?” When asked about his personal mantra for happiness, Branson said “The way I see it, there is a reason we are called human beings and not human doings. As human beings we have the ability to think, move and communicate in a heightened way. We can co-operate, understand, reconcile and love. That’s what sets us apart from most other species. So in 2017, don’t forget the to-do list, but remember to write the to-be list too”.

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A Wake-up Call for Retirement

A Wake-up Call for Retirement

New Zealand must wake up to the fact that our aging population means NZ Superannuation will become increasingly unaffordable. The number of people over the age of 65 will double in the next thirty years and the net annual cost of NZ Superannuation will triple over the next twenty years from $11 billion to $36 billion. The Commission for Financial Capability has recently released the recommendations from its 2016 review of retirement income policies. Retirement Commissioner Diane Maxwell is now calling for the age of eligibility for NZ Superannuation to be increased to 67 by 2034, and for the age of access to KiwiSaver funds to be decoupled from NZ Superannuation.

New Zealand is lagging behind other countries in making changes to retirement age. Australia, the UK, and many European countries have taken steps to improve the financial sustainability of their pension schemes, most commonly by raising the retirement age. John Key refused to discuss the possibility of making changes while he was in office. That obstacle is no longer there and we need to start the debate.

The Commission is also recommending a number of changes to KiwiSaver, to make this a more effective vehicle for retirement saving. These include increasing the minimum contribution from 3% to 4%, allowing people to make contributions at a higher percentage than currently, and allowing people over the age of 65 to join.

To help fund NZ Superannuation, the Commission recommends that Government resume contributions to the NZ Superannuation Fund. Presently, new migrants are eligible for NZ Superannuation after 10 years, and the Commission recommends increasing this to 25 years. As well, the Commission recommends removing the option for non-qualifying partners of superannuitants to also receive a pension.

The bottom line is we all need to take more responsibility for our own retirement.

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Choosing the Right KiwiSaver Options

Choosing the Right KiwiSaver Options

Joining KiwiSaver is a no-brainer and there are now around 2.6 million members. There are three key decisions to be made when joining; the contribution rate, the investment option and the provider. It’s best to make the decisions in that order. Your contribution rate should be set at the rate that gets you closest to an annual contribution of $1,042 which will then give you the maximum annual tax credit of $521. If you want to save more, save into a diversified fund which is not locked in.

The key determinant of your investment option is your investment time frame. The range of options is usually something like Defensive, Conservative, Balanced, Growth and Aggressive. The longer your time frame, the more you should invest in growth assets (property and shares). Aggressive funds have the highest exposure to growth assets and Defensive funds have the lowest. While growth assets are more volatile in the short term, they will give a higher return than income assets (cash and fixed interest) over the long term. Note that your investment time frame doesn’t finish on the day you retire; it finishes on the day you decide to spend your money. Many retirees are choosing to leave their KiwiSaver invested as a reserve fund for later in retirement. This means that even at age 65, they might still have a long investment time frame before they spend their funds.

Once you have decided on the best mix of growth and income assets, you can compare providers to see which ones have the best performance, after the deduction of fees, for that kind of fund. Don’t be hung up on fees alone; there is nothing wrong with paying more in fees if the provider produces a better performance net of fees. It’s the bottom line that counts!

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Give Money for Christmas

christmas-moneyGive Money for Christmas

Whatever your age, Christmas is a stressful time of year, and much of the stress is caused by financial pressure. It seems rather silly that so much precious money is spent on gifts that may not give lasting pleasure, if any at all. Economists would argue that spending money on gifts for others does not give the most satisfaction (or utility, in economic jargon) per dollar spent. That’s because it’s not easy to judge how much the other person will appreciate the gift.  Despite that, we still give gifts as an expression of love, gratitude or concern for someone’s wellbeing. Yet there are lots of reasons it’s good to give money instead of, or as well as gifts.

To start with, there are plenty of people who could do with a bit of extra cash at Christmas to pay for necessities rather than luxuries. For students with low incomes and big debts, elderly people struggling to pay their bills, and children who are saving for something they really want, money is a welcome gift. You can use a gift of money as a way of teaching children about money; that is, explaining to them the need to set aside money for later, or to save for a goal. You could even give a small investment of shares or a managed fund to teach children how investment markets work.

Giving money doesn’t have to be boring. Check online for creative ways to give money. There are plenty of ideas for how to use notes and coins to make decorative gifts, such a money bouquet, a money Christmas tree, or a box of money ‘chocolates’.

Christmas is a time to think about giving to those who are most in need. Include a charity on your Christmas list to spread the good cheer!

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Pension or Lump Sum?

pension-or-lump-sumPension or Lump Sum?

Many retirees are in a position where they need to decide between taking a pension or a lump sum on retirement. Workplace pension schemes may offer options of a lifetime pension, a lump sum or a combination of the two. A part lump sum option also applies to members of the old Government Superannuation Fund Scheme and to people who have transferred a UK pension (under certain conditions). In addition, you can now use a lump sum to purchase your own annuity providing a regular monthly payment for life. In all these situations, the key question is “Should I take a pension or a lump sum?”

The answer will depend on your personal situation. The advantage of a pension is that it provides a known amount of income for the remainder of your life. This helps take away the uncertainty of how long you are going to live and what investment returns will be. If you live longer than the average person, the total value of the payments you receive will be more than the value of the lump sum invested (plus returns). The key disadvantages with a pension are that you cannot access the capital sum invested, and if you die before the average life expectancy, any funds not already paid out to you will be forfeited. To avoid these situations, you can invest a lump sum in a variable annuity which allows partial access to capital and has a residual value at the end of life.

The key factors for considering your options are your life expectancy – based on your health and family history of longevity – and your ability to access large lump sums if required. If you have a decent lump sum in addition to a pension or an annuity you may have the best of both worlds.

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Being Prepared

being-preparedBeing Prepared

There’s nothing like a week of earthquakes, floods and gales to make you realise the importance of being prepared for disaster. It’s not only environmental conditions that create disaster; there are personal disasters too, such as serious illness, loss of a family member or loss of a job.

A disaster of magnitude has financial consequences, whether it is loss of property, a temporary loss of income, loss of the ability to earn income, or increased costs. Preparing for a disaster starts with asking the ‘What if….” question. What if I am involved in a serious earthquake? What if I suffer a serious illness or injury and I am not able to work again for several months or even years? Try and imagine yourself being in that situation today to identify what you need to do to be prepared.

  • Is your home and business insurance up to date? The Earthquake Commission provides insurance for homes, land and contents for natural disasters. However, to make a claim from the Commission you need to have a current home or contents insurance policy.
  • If you run a business, do you have business interruption insurance? You can arrange cover for lost income or expenses if your business is not able to operate as usual.
  • Do you have adequate life insurance and income protection insurance? If you were to lose your life or suffer a serious injury or illness, your family may be left in a dire financial situation.
  • Do you have an emergency fund? The rule of thumb is to be able to easily access three months of living expenses.
  • Do you have all your insurance details to hand? Scan your policy details and keep them on a flashdrive in your emergency kit or other safe place so you can quickly make a claim.
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The Decline of the Middle Class

decline-of-the-middle-classThe Decline of the Middle Class

This year has had its share of surprises. Brexit and Trump have both caught the world unawares and, although both the Brexit referendum and the US elections were separated by time and place, there is a common theme which provides an explanation for the results; the decline of the middle class.

It has been eight years since the global financial crisis. Economies have been characterised since then by low growth, low inflation, low interest rates and high unemployment. It has been a hard slog for the working class, particularly those in older age brackets who have found it more difficult to get work or who have seen their retirement savings impacted by low investment returns. There is an increasing level of disparity between the rich and the poor, which has led to an angry, disaffected working class looking for a different solution to their economic problems.

A research report from McKinsey Global Institute, published in July, 2016, called “Poorer than their Parents: Flat or Falling Incomes in Global Economies” found that the trend for stagnating or declining incomes in the middle class is not just occurring in the US – it is a global phenomenon. The report found that as many as 70% of the households in 25 advanced economies saw their earnings drop in the last decade. This compares to just 2% of households who had declining incomes in the previous twelve years. The middle class, who have had the expectation of their fortunes increasing over their lifetimes, have been hugely disappointed; hence their vulnerability to influence by radical politicians touting new solutions. We have seen evidence of this in the UK and the US, and other economies may yet have a similar experience. Increased polarity between rich and poor leads to unrest and pressure for political and economic change.

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The Rise, Fall and Rise of Property Syndicates

property-syndicatesThe Rise, Fall and Rise of Property Syndicates

Falling interest rates are prompting investors to look elsewhere for returns, and, with the uncertainties of the share market, property is where they are looking. However, the rush for residential investment property has pushed prices through the roof. Commercial and industrial property is out of reach for the average investor and so property syndicates are back in favour again.

Markets go in cycles and about twenty years ago we saw the same trend. Interest rates had fallen, along with inflation, and people, particularly retirees, were looking for higher income returns. Companies like Waltus, Dominion Properties and St Laurence flourished. Opportunities to buy into property syndicates were quickly snapped up. While the property market was buoyant, investors were happy. It wasn’t too long before the risks became obvious. Some syndicates performed better than others. Investors who wanted to cash up their investments, particularly the non-performing ones, found it increasingly harder to find other investors to sell to. It was unclear when the syndicates would be wound up and the funds returned to investors. Eventually, providers were forced to roll the syndicates into one fund which meant that in effect, investors in high performing properties received a lower return so those in low performing properties could receive a higher return.

Investing in a property syndicate is akin to putting all your eggs in one basket. Liquidity is poor and promised returns may not eventuate if the tenants default or the building requires extensive refurbishment. Syndicates are a more expensive way to own property than owning it directly as the syndicate manager charges a fee. Alternative options for investing in commercial and industrial property are to invest in a listed property trust, or a property managed fund. While there are still management fees to be paid, they offer much greater diversification and liquidity

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Personality and Investment Decisions

personality-and-investmentPersonality and Investment Decisions

People who find themselves suddenly having to make significant investment decisions often feel overwhelmed, confused, or even afraid. They fear making costly mistakes which could jeopardise their financial futures. In most cases, fear stems from lack of information, understanding or experience which undermines confidence in making the right decisions. These emotions can bring about the very thing that is feared – that is, costly mistakes. Learning to invest is a bit like learning to ride a bike. When you first get on a bike, never having ridden before, your fear of falling off means you ride slowly with your feet ready to touch the ground, so you are much more likely to fall. Once you learn to proceed confidently with your feet firmly pushing the pedals, you have a quick, smooth ride with a low risk of falling.

Fear can lead to procrastination of decision making, or inertia. The cost of not making an investment decision or delaying it is the opportunity cost, which is the investment return that could have been achieved if the decision had been made earlier. Fear can also lead to panic decisions after an investment has been made, which can result in actual loss or in opportunity cost.

On the other hand, some investors are over-confident which means they take on high risk that can lead to disastrous consequences. Somewhere in between are those investors who stick to a narrow range of investment options they are familiar with and who lack the confidence to step outside that range. This means their investments can lack diversification resulting in increased risk or opportunity cost.

Investors often behave irrationally, without logic or reason, driven  by emotion. In the words of author Jason Zweig, “Investing isn’t about beating others at their game. It’s about  controlling yourself at your own game”.

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