June 10, 2020 Investing 1 Comment

Is your business eligible for COVID-19 Wage Subsidy Extension

by Alpha

COVID-19 made a huge impact on the New Zealand economy and many businesses are forced to shut down or reduce their capacity during the lockdown. The New Zealand government launched COVID-19 Wage subsidy back in March to support employers and keep more kiwis on the payroll. The original subsidy came to an end on 9th June and replaced by COVID-19 Wage Subsidy extension with tougher criteria. I recognize it would be hard to compare the revenue if you are a sole trader or small or medium-size business with irregular income pattern while the business starting to pick up. You may not be eligible by comparing month-end revenue but you may be eligible by comparing 30-day revenue day by day. So I’ve made a spreadsheet to help the employers and sole traders to check if they may be eligible for the COVID-19 Wage Subsidy extension.

Disclaimer, I am not a qualified accountant. Please consult with a qualified accountant if you are unsure if you are eligible.

COVID-19 Wage Subsidy Extension

A Wage Subsidy Extension payment will be available to support employers, including sole traders, who are still significantly impacted by COVID-19 after the Wage Subsidy ends.

The subsidy extension will be paid at a flat rate of 585.80 for full time (20+ hrs) workers and 350 for a part-time worker (under 20 hrs). The subsidy is paid as a lump sum and covers 8 weeks per employee.

The employer who received the subsidy, need to pass the subsidy to employees, retain the employees for the duration (8 weeks) of the subsidy and do their best to pay employees at least 80% of their normal pay.

What the criteria

In order to get the wage subsidy extension, you must be

An eligible employer (including contractor and sole traders)
The business must be in New Zealand
The employee must be legally working in New Zealand
You can only apply for subsidy extension after your previous subsidy finished

The most important criteria in the subsidy extension is you must have a revenue loss of at least 40% for a continuous 30 day period. This period needs to be in the 40 days before you apply (but no earlier than 10 May 2020) and must be compared to the closest period last year.

Full criteria list on Work and income

40% loss in 30 days

For any business who is using any accounting software, it will be very easy to generate a report to compare your month-end revenue with the same month last year. However, if your business has an irregular income (like lots of sole trader and Small businesses), your month to month comparison may show you don’t have a 40% drop but your daily comparison slows otherwise.

Here is an example of a small imaginary business with irregular income between June and July in 2019 and 2020.

It had lots of days with no income, some days with under $1000, and some days with $6000+ income.

Here is the month to month income.

There is a drop in July but not a 40% drop. By the looks of it, this business is not eligible for wage subsidy.

However, if we calculate the 30-day total revenue not just at month-end but for every day from 30/6 to 31/7, we will have more data point to compare. On 30/6, the 30-day revenue will be between 1/6 – 30/6. On 1/7, the 30-day revenue will be from 2/6 – 1/7, on 2/7 it will be 3/6 – 2/7… and so on.

I charted the result in the graph below. There is a small window on 2nd and 3rd July that 2020 revenue is lower than 2019 data.

If we focus on the data point at 2/7, it shows between 3/6 to 2/7 in 2020, the 30 days revenue dips below 40% compared to the same period in 2019. It would have been missed if you only compare month-end data.

What this Google sheets for

This google sheet is designed for New Zealand sole trader or Small and medium-sized business owners to check if they fit some of the criteria. It will check when is the earliest they can apply, and it will calculate and compare any continuous 30 daily revenue of this year to the same period in 2019 and check if you have a 40% drop on a day by day basis.

Here is the link for the google sheets

How does it work

Once you click the link, it will ask you to make a copy of the google sheet to your own google drive so all those data stays with you and you alone.

Now you’ve got the google sheet opens up, you can start by putting in the date you received your first wage subsidy at C5. It will calculate the earliest you can apply for wage subsidy extension. Leave it blank if you did not apply.

Once you put in the date, it will check if you can apply the subsidy today.

Next, you will need to fill in your daily revenue in between 10/5/2019 to 31/8/2019 in B19 t0 B132. It will use that data to calculate the 30-days total revenue on column C, apply a 40% drop on 30-days revenue on column D.

After you completed your 2019 revenue figures, you can start filling in revenue from 10/5/2020 on F19 and onward.

If you fill in those daily revenues, it will calculate the total revenue for the prior 30-days and compare that with the same period last year in Column H. You first set of 30-day revenue will appear at C48 and G48.

Example

Here is an example on the google sheet of an imaginary coffee shop owner. She applied for 1st wage subsidy and received on 10/4.

She is trying to apply for the wage subsidy extension as she had a tough month in May. Although her 30-day revenue suffers a 75% drop at the beginning of June, She was not eligible for subsidy in June because the previous 12 weeks Wage Subsidy hasn’t finished. The earliest she can apply will be on 3/7.

Her revenue in May was about 75% drop, but things start to turn around in June and business started to pick up after lockdown lifted. On 3/7, her revenue was about 30% drop compare to the same time last year which is less than a 40% drop. So the in Column H, it shows she is NOT eligible for subsidy extension on that day.

However, according to the wording on Work and income, she needs to show a revenue loss of at least 40% for a continuous 30 day period and that period needs to be in the 40 days before she applies. 40 days before 3/7 was 25/5, and the 30-day revenue that started with 25/5 was on 23/6. So in our example, she can use the revenue reported any day between 23/6 to 3/7 to apply.

So the sales data on 29/6/20, which contain revenue from 31/5 to 29/6, was within the 40 days period and it was lower than the same day in 2019. So it matches the criteria revenue loss of at least 40% for a continuous 30 day period.

Hope this google sheet can help you work out your eligibility and keep more Kiwis on the job. Once again, this tool is for reference only. If you are unsure about your eligibility, please check with your accountant.

April 23, 2020 Investing Leave a comment

Quick Tip: Work out your minimum investment target while in Lockdown

by Alpha

As we are coming to an end of our nation lockdown, most of us got a unique opportunity to find out roughly what will our minimum investment amount to achieve financial freedom would be. Also known as our minimum FIRE figure or LeanFIRE number.

How to work it out?

So here is the quick and dirty way to do it: Add up your household expense (ignore mortgage payment) from 26 March to 22 April (4 weeks), multiply by 13, then multiply by 25, that will be your rough target.

[4 weeks of basic living expense] x 13 x 25

If you use EFTPOS and credit card, you can easily export those data from your banking app.

Example:

Here is the household spending for Eric’s household during those 4 weeks lockdown

Supermarket $1056.76

Mortgage (ignored) $2400

Power and Gas $283.25

Water $73.05

Internet and Phone $84.99

Health insurance $190.55

House insurance $109.28

Car insurance $82.52

Mobile phone $50

Subscription $29.98

Total $1960.38

$1960.38 x 13 x 25 = $637.123.50

So Eric’s minimum investment target will be roughly around 637k right now.

Your basic living expenses

The logic behind this calculation is due to Covid19 lockdown, most of us should be staying home during those 4 weeks and only go out for essential service (like a supermarket). There should be no going out for dinner, grabbing coffee with friends, going to movies, buying lunch at work or any extra activities.

Your Lockdown Lifestyle

You were basically living like a retired person who is not going out for 4 weeks. So what you’ve spent in those 4 weeks should be your basic living expense (or somewhat close to it.)

We took those 4 weeks basic expenses, multiply by 13, that will be your basic living expense for 52 weeks, a full year.

The Multiply By 25 Rule

In personal finance, the Multiply by 25 Rule estimates how much money you’ll need in retirement by multiplying your desired annual income by 25.

The reason being a long term average return on investment mix with shock and bond will generate around 7%. Meanwhile, inflation and fees tend to erode the value of the dollar at roughly 3% per year. It means your “real return”—after inflation—will be about 4 per cent.

Your investment will last for a long time if you withdraw 4% every year as your living expense. If you live on $40,000/year, you will need an investment for $1,000,000 to withdraw that 4% on (and $1,000,000 is 25 times of $40,000). Hence you multiply your annual expense by 25, you’ll get your investment target.

Your Minimum target

Now with the basic living spending for 4 weeks, multiply 13 to our basic living spending for 1 year. Multiply that with 25, that will be your rough minimum investment target now.

For Eric, his target 637K. Which means that in theory, if Eric is debt-free, fully pay off this housing mortgage and had investment for around 637k (or more) in place, he can stop working, retire and continue his lockdown living style (no going out, no coffee date, no travel, no shopping) for a long time. However, in reality, he will need a bit more than that.

It’s just a rough Target

There are a couple flaws of this calculation.

Ignored annual or quarterly expense: This quick and dirty calculation ignores the your council rate payment, WOF expenses and Rego fee, or if you pay insurance annually. Of course, you can add those back in by calculating the 4-week portion of those expenses
Ignore seasonal expense: This is the expense for a March/April month. Your winter energy bill will be higher. Also, people tend to spend more over special occasion like X’mas, Birthday and Anniversary.
Doesn’t work if you still going out for work every day: If you are an essential worker, thank you for doing your part. However, your expenses is not really a basic minimum expense. However, you can adjust it by taking out the petrol expenses.
That the target for right now: This target is not adjusting for inflation. If you got a nice 500K target today. You got inspired and you work hard, save hard and invest well for the next 10 years to reach that 500k. You will find out you need around 750k at the time because of inflation. To adjust your target with inflation,
- 10 years from now, multiply by 1.48
- 15 years from now, multiply by 1.8
- 20 years from now, multiply by 2.19

So to sum it up, this is a quick and dirty way to work out your investment target. Especially for those who never think about retirement or finance independents, this is an easy way to have a rough idea of how much you will need at the low end. You may be surprised by the number.

December 12, 2017 Index Fund, Investing AMP Capital NZ, investnow 6 Comments

New AMP Low-Cost Index Fund VS SmartShares ETF, Which one is the better deal?

by Alpha

AMP Capital NZ introduce three new low-cost index funds for New Zealand investors. Yay! They are available for AMP’s client and on InvestNow platform.

Three New Index Fund

AMP Capital NZ have been offering investment fund and KiwiSaver fund for New Zealander. Most of their funds are actively managed. So its great to see AMP bring the passive fund to their client. According to Investment News article, AMP Capital NZ managing director Grant Hassell said, “there’s been a lot more demand than we expected from retail investors [for passive options].” It great to see more New Zealand companies on board with the low-cost passive investing movement.

Here is the summary of those new index Fund

NZ Shares Index Fund

Description: Aims to provide a return that closely matches the return of the S&P/NZX 50 Index (on a gross basis and including imputation credits).
Risk Indicator: 4
Management fee: 0.33%
Buy/Sell Spread: 0.10%
Similar Fund/ETF: NZ Top 50 from SmartShares

All Country Global Shares Index Fund

Description: Aims to provide a return that closely matches the return of the MSCI All Country World ex Tobacco Index in New Zealand dollars with net dividends reinvested (69% hedged to the New Zealand dollar).
Risk Indicator: 5
Management fee: 0.38%
Buy/Sell Spread: 0.15%
Similar Fund/ETF: Vanguard International Shares Select Exclusions Index Fund (Hedged) – NZD Class on InvestNow

Hedged Global Fixed Interest Index Fund

Description: Aims to provide a return that closely matches the return of the Bloomberg Barclays Global Aggregate Index, fully hedged to the New Zealand dollar.
Risk Indicator: 3
Management fee: 0.39%
Buy/Sell Spread: 0.10%

They are structured PIE funds, do not have annual admin fee, and minimum investment amount is $50.

Unlike some fund manager which charge active management level fees on their passive investment options, those index fund options from AMP Captial are actually cheap in New Zealand standard. Kudos to AMP!

Well Done AMP!

Buy and Sell Spread

You may notice apart from the usual management fee; there is a Buy/Sell Spread for the fund. All AMP fund have Buy/sell spread, and they are your entry and exit fee.

For example, if you decided to put $10,000 into All Country Global Shares Index Fund, 0.15% of $10,000 will be taken out as buying cost. So only 10000 – (10000 x 0.15%) = $9,985 will be in the fund.

Three years later, your investment in that fund grow to $12,000, and you want to cash out. When you cash out your investment, 0.15% of $12,000 will be taken out as selling cost, and you will end up with $11,982.

When you buy and sell shares, there will be a transaction cost. ASB and ANZ charge a retail customer $30 or 0.30% for each transaction. The fund manager also needs to pay for buying and selling shares for their fund.

You may not see Superlife and Simplicity charging a separate buy/sell spread, but it doesn’t mean they don’t have to pay a transaction cost. They decided to include those costs into the management fee and make it simple for investors.

Usually, I’ll prefer simple fees structure because in some cases, a fund manager will list multiple fee item to confuse the customer and charge more fees. However, I do believe having a buy/sell cost will benefit long-term investor like me.

First, buy/sell cost separated from management cost means the management cost can be reduced to a lower level (it’s no guaranteed fee will be lowered. Some other fund just use that as an excuse to charge more fees). Second, as a long-term investor, I will only buy a small amount every month, so buy/sell spread won’t reduce my return much. Finally, for those who think they can time the market and try to get in and out a lot, they will pay for their transaction. I am happy to know my money are sitting nicely in the fund. The cost of the transaction from other investors won’t eats into my return.

Therefore, having a Buy/Sell Spread will be good for the investor as long as it reduces the overall cost for investors. On the other hand, it does make it harder for investors to compare the cost. Don’t worry; I’ve done the hard work for you.

SmartShare Vs AMP Capital

AMP Captial NZ Shares Index Fund will track S&P/NZX 50 Index, which is designed to measure the performance of the 50 largest, eligible stocks listed on New Zealand stock market main board. SmartShares NZ top 50 ETF is tracking a very similar index, the S&P/NZX 50 Portfolio Index, which also measures the performance of the top 50 companies in New Zealand stock market main board. However, there is a 5% cap on the individual stock, that is more aligned with what a retail investor may hold.

S&P/NZX 50 Index returns are: 3 Years – 9.79%, 5 Years – 10.99% and 10 Years – 2.51%.

S&P/NZX 50 Portfolio Index returns are: 3 Years – 10.15%, 5 Years – 11.72% and 10 Years – 3.31%.

SmartShares NZ top 50 ETF will charge 0.5% management fee. If you are in the SmartShares saving plan, there will be a one-off set up fees for $30. If you invested in Superlife NZ top 50 ETF Fund, the management fee would be 0.49%, no setup cost but there will be a $12/admin fees. On my previous post, we calculated SmartShares would be cheaper if the value of your fund is under $120k. Earlier this year, InvestNow added SmartShares NZ Top 50 ETF fund on their platform. InvestNow customer can bypass the $30 set up fee which made InvestNow be the best options for NZ top 50 Index fund.

Now AMP Captial NZ Shares index fund offer no setup fees, no admin fee, and management fee at 0.33%. There will be a buy and sell spread for 0.1%.

10-Years Analysis

Since the costing structure of SmartShares and AMP’s is a bit different, I decided to run a 10-years analysis for both options to see which fund will pay less on fees and provide a better return for the investors.

I will be using NZX Gross return from 2004 and 2014 as my return data. It has a right mix of bull market (04-07), recession (07-10) and recovery (10-14). The tax will be ignored in this analysis.

We will compare an investor putting $50/month in each fund for ten years and will cash out all investment at the end. For SmartShares NZ Top 50, we will use InvestNow platform as this is the most cost-efficient way.

Here is the result for SmartShares NZ top 50 ETF via InvestNow

Here is the result for AMP NZ Shares Index Fund.

SmartShares balance was higher at the beginning as there was 0.10% buy spread charged on AMP investor. However, since AMP charge less on management fee, the money stays in the fund generated a better return. In the end, AMP NZ Shares Index Fund valued at $8,481.82 and SmartShare NZ Top 50 ETF valued at $8,423.70. AMP total fee paid is $124.95 (1.47%) compare to SmartShares at $166.55 (1.98%).

Therefore, for long-term investing, AMP NZ Shares Index Fund came out ahead by a small margin, 0.69% at the 10th year mark. Since there is no fixed-dollar fee, this result will be the same if you invest $50 or $500/month. AMP investor will have a better return from year 3 and onwards.

What Not to DO

In some situation, AMP will cost you more. Since AMP charge 0.10% on Buying and selling, if you move your money in and out a lot, it will cost you a lot of fees.

The simple way to understand is to imagine you move some money into the fund, got charge 0.10% on buy spread; you keep the money in for one year, got charged 0.33% management fee; you move it out at the end of the year, got charge 0.1% sell spread. So in that year, you’ve got charged 0.10% + 0.33% + 0.10% = 0.53%. So it charged more than SmartShares ETF.

If you keep putting money in and stay in the fund, the money in the fund will charge a lower management fee. Lower management fee means more money is remaining in the fund and it should provide a better return for you. Therefore, to optimise your return, you should avoid moving your money around and stays in the fund.

Tax on Investors

Those three funds are PIE funds. Investors with PIR lower than 28% will benefit from AMP fund because SmartShares ETF is listed-PIE fund. You will be tax at 28% regardless of your PIR with SmartShares. Check out my previous post on Listed-PIE vs multiple rated PIE fund and work out your PIR here.

Should You Switch?

The margin of difference is not that big, we are talking about 0.69% after 10 years, so it’s not a “drop everything and switch NOW” situation. However, if you are aiming to optimise your return, AMP should be the better choice. If you are on lower PIR, or you still don’t like SmartShares’ improved user interface, switch over to AMP.

Personally, I think I will invest in this AMP fund via InvestNow. Since I already have an account with InvestNow, I can quickly put some money in without signing up with AMP.

Conclusion

Three New index fund from AMP Capital NZ
No annual fee for all funds, lower management fees, the investor will be paying buy/sell spread, minimum investment from $50, structured as PIE fund.
NZ Shares Index Fund – is the cheaper version of NZ Top 50 ETF, management fee at 0.33%, Buy/Sell spread 0.10%
All Country Global Shares Index Fund – is the more expensive version of Vanguard fund in InvestNow but as structured as PIE fund (no tax return required), management fee at 0.38%, Buy/Sell spread 0.15%
Hedged Global Fixed Interest Index Fund – managed fee at 0.39%, Buy/Sell spread 0.10%
Buy/Sell spread is buying and selling cost for the investor. In this case, its benefit long-term, buy and hold investor.
NZ Shares Index Fund will be cheaper than SmartShare NZ Top 50 ETF if you hold it for long-term
It will cost you a lot of fees if you try to time the market and move your money in and out a lot.
All three funds are available from AMP Captial NZ and on InvestNow platform

December 7, 2017 Investing, KiwiSaver, Mortgage First home, First home buyer, Housing New Zealand, KiwiSaver First-Home Withdrawal, KiwiSaver HomeStart grant Leave a comment

Should you Withdraw the Maximum Amount from your KiwiSaver for your First Home?

by Alpha

We have a sky-high house price in New Zealand at the moment, especially if you are looking to buy in major cities such as Auckland, Wellington, and Christchurch. To get your first home, you will need all the help you can get. Here comes the KiwiSaver.

KiwiSaver First-home Withdrawal

A KiwiSaver member can withdraw most of their fund from KiwiSaver to pay for your first home. Here is the condition

You must have been a KiwiSaver member for three or more years.
You can ONLY withdraw money to purchase your first home – not an investment property.
A couple can both use their KiwiSaver withdrawal on the same property as long as it is their first home.
KiwiSaver members can withdraw most of their fund out but must leave a minimum balance of $1000 in your account.

Joe and Jill buying their First Home

Joe and Jill are a young married couple. They want to get into their first home. They’ve $65,000 cash saved up for their first home. They want to buy a $435k house in Wellington.

Screen Shot 2017-11-21 at 10.42.31 PM.png

The $435k Dream House for Joe and Jill

To buy that house, they will need to come up with a 20% deposit. For a $435k house, they will need $435,000 x 20% = $87,000. The cash they have are not enough for a 20% deposit, but luckily, they are both in KiwiSaver. Here is their KiwiSaver balance.

Joe joined KiwiSaver 2 years ago with the balance of $7,000.
Jill joined KiwiSaver 10 years ago with the balance of $48,000.

Since Joe only in KiwiSaver for 2 years, he cannot withdraw his KiwiSaver balance. However, they will have enough with just Jill’s KiwiSaver.

Jill withdraw $47,000 from her KiwiSaver and left $1,000 balance in her fund. They use that money and combine with their cash, they managed to buy their first home with a mortgage.

Don’t put everything in KiwiSaver

Will and Grace also want to buy a house for $400,000. They are both in KiwiSaver for 4 years, and they were contributing 8% to KiwiSaver. They had $85,000 total in KiwiSaver and kept $10,000 in their bank. If they want to get into a $400K house with a 20% deposit, they will need $80,000. They can withdraw up to $83,000 from their KiwiSaver account.

They managed to get a $400K house from an auction (Yay!) and the real estate agent ask them for a 10% deposit on that day. Will thinks ‘No problems, I’ve got that money in my KiwiSaver.’ However, the fund in KiwiSaver can ONLY use for settlement and cannot withdraw before that. The winner of the auction is required to pay a deposit on the same day, usually at 10% of the price. So now Will and Grace need to come up with a $40,000 cheque in a short time.

Withdraw Maximum or Just Enough

I’ve got a couple readers asked about KiwiSaver First Home withdraw. One of the questions is,

Should you withdraw just enough for home deposit or withdraw maximum from your KiwiSaver?

There are good reasons for both sides of the argument. If you withdraw just enough on the KiwiSaver, more money will stay in KiwiSaver, and it will provide a better return in the future. For a 10-20 years terms, the money sitting in KiwiSaver should be averaging 6-7% return after tax and fees. Compare that to the interest of your mortgage at 4-6%, it seems better to leave the money in KiwiSaver and invest it.

On the other hand, if you withdraw all the maximum amount from KiwiSaver, you can put whatever you have as your downpayment and reduce the size of your mortgage. You can also keep same mortgage amount and have more cash on hand for emergency or home improvement.

Back let’s go back to our example of Joe and Jill and see how those two options work out. Here are the basic info and some assumption for our analysis.

House Price: $435,000
20% Deposit: $87,000
Cash on Hand: $65,000
Emergency Fund Ideal Level: $10,000
Jill’s KiwiSaver Fund Balance: $48,000
Jill’s KiwiSaver Monthly Contribution (include employer and MTC): $277.17
KiwiSaver Fund Long Term return (after tax and fees): 7%/year
Home Loan Interest rate average: 5.5%/year

Options 1 – Withdraw just enough

They will keep $10,000 cash on hand as an emergency fund and put $55K toward the deposit. They also withdraw $32,000 from Jill’s KiwiSaver fund to make up the 20% deposit. Here is their financial breakdown

Mortgage: $348,000 (30 years term)
Minimum Mortgage payment: $1,975.91/month
Cash on hand: $10,000
Jill’s KiwiSaver Fund Balance: $16,000

Options 2 – Withdraw maximum

They will keep $10,000 cash on hand as an emergency fund. They put their remaining cash ($55k) plus withdraw the maximum amount ($47k) from KiwiSaver toward to their downpayment ($102k). The mortgage amount will reduce to $333k, but they will pay it off as a $348k mortgage.

Mortgage: $333,000 (30 years term)
Minimum Mortgage payment: $1,890.74/month
Actual Mortgage payment: $1,975.91/month
Cash on hand: $10,000
Jill’s KiwiSaver Fund Balance: $1,000

30 Years down the road

In option 1, Joe and Jill will pay off their mortgage in 30 years while Jill’s KiwiSaver growth from $16,000. Here is the breakdown:

At the end of the 30 years, they will fully own their house, and Jill’s KiwiSaver’s balance is $468k.

In option 2, Joe and Jill will pay extra on their mortgage every month, and they will pay it off in 27 years. Once the mortgage is gone, they pay extra into the KiwiSaver.

At the end of 30 years, they fully own their house, and Jill’s KiwiSaver’s balance is $425k.

Not a clear cut answer

Based on the numbers, option 1 will have a better financial position compared to option 2. We already know that from the beginning because we set the after-tax return on KiwiSaver at 7% and mortgage interest at 5%. KiwiSaver and investing will always come out on top when you compare the number this way.

However, after I understand about risk and being a first home owner for couple years, I will prefer to reduce the mortgage (option 2).

First, there is always risk associated with investment because you’ll never know whats gonna happen. The long-term average return will be 7%, but that is based on past performance. We should keep in mind that past performance is no guarantee of future results. For all that we know, our investment maybe heading 10 years of negative returns. Also, the mortgage interest rate is not guaranteed as well. Past data shows the interest rate is at the historic low so there is real possibility it will go up. On the other hand, the return from paying off your mortgage is guaranteed and tax-free.

There is the risk in investment. Also there is the risk in life. Being a first-time homeowner with a mortgage, it will put you in a position that you’ve never been (for most people anyway) – you are DEEPLY in debt.

Before you purchase your first home, you may be someone with not much asset and a little or no debt. Once you’ve bought the house with the mortgage, you are now partly own a big asset (the lender still own the most), had a mortgage 5-15 times of your annual income, don’t have a lot of cash on hand and a big part for your income went to mortgage repayment. Financially you are in a vulnerable situation. If something happens with your life like job loss, sickness, accident or something you’ll need to fix on the house, you may be short of cash. You should avoid being in this situation by having a smaller mortgage (pay more on deposit) or have more cash on hand.

Some personal experience here. Wife and I found out we are having our first baby just 1 week after we won a house in an auction. All of our budget plans are out of the windows. We were down to one income for couple month as a new house owner. Luckily, we did one thing right on our mortgage was putting over 20% down payment on our house while the bank was advertising 5% deposit. With a bigger down payment, come with a small mortgage and a smaller minimum payment. We were managed to get through that period with careful planning and frugal living. I can’t imagine what sort of pressure we will be in if we just put down 5% deposit and borrow 95% on the house.

Based on those reasons, I personally prefer getting the maximum amount out of KiwiSaver and put it toward mortgage or keep it on hands for at least 1 year.

It’s better to withdraw Maximum

Your situation and risk appetite may be different than mine, and you may prefer to keep the money in KiwiSaver for your retirement. However, I will still recommend you withdraw the maximum amount no matter what choice you’ve made.

The reason is you can only withdraw from KiwiSaver once, but you can always put your money back in later. By having more cash when you move into a new house, it will help you to deal with any unexpected situations.

Let’s go back to our example of Jill. Jill’s KiwiSaver balance is $48K, and the maximum amount she can withdraw is $47K. She may decide to put down 20% deposit, just withdraw $32K and keep $16K in KiwiSaver for retirement (option 1).

I would suggest she still withdraw $47K out and put $40k from their cash for their 20% deposit. Now they will have $25K cash on hand and $1,000 in Jill’s KiwiSaver. She will hold on to that cash for 6-12 months to make sure their house is in order, and there is no major repair required. If everything’s fine and Jill still prefers to invest with KiwiSaver, she can put it back into her KiwiSaver after 12 months as KiwiSaver allows members to make manual contribution anytime.

How can You decide

There is a simple way to help you decide to keep the money in KiwiSaver for retirement or help reduce your mortgage.

Imagine you fully own your house today with no mortgage at all. Will you borrow $X on your house to invest in KiwiSaver for your retirement and won’t get it out until you are 67? (X is the difference between withdrawing everything and just enough. In Jill’s case, that will be $15,000.)

What I did was reserve the situation and let you look at the question from the other side. Mathematically, invest your available cash in KiwiSaver and not paying off your mortgage is the same as borrowing on your house to invest in KiwiSaver. Once I frame the question this way, you will feel the security of owning your house and the risk of investing.

Other Support from KiwiSaver

Apart from First Home Withdrawal, KiwiSaver member may be qualified for KiwiSaver HomeStart grant. Check out the information on Housing New Zealand site or contact your KiwiSaver provider.

I will continue to write more about mortgage in the coming days. There is a mortgage set up that allows the homeowner to reduce their mortgage amount while having access to cash if they need to. So stay tuned for my blog post on the Best Mortgage structure for most homeowners in New Zealand.

November 24, 2017 ETF, Investing SmartShares 3 Comments

SmartShares New Investor Portal (Bye Link Market Service)

by Alpha

SmartShares just added a new investor portal for their existing investors. This portal makes it easier for investors to check and manage their SmartShares investment.

The Old Days…

In the past, if you join the SmartShares saving plan (a.k.a monthly contribution plan), you will have to register with Link Market Service with your CSN and FIN number to check the value of your holding. If you want to change your contribution level or make a lump sum investment, you will have to contact SmartShares by phone or email to arrange that.

Now with the new Investor Portal, SmartShares user can

Actively manage their regular savings plan;
Make lump sum contributions to their Smartshares account;
Invest in additional ETFs without additional establishment fee; and
View their investment balance

This service is available for all existing SmartShares saving plan client for free. Let’s check out the portal.

New Investor Portal

When you go to SmartShares website, you can see there is a new section on the top right “Existing Investor”.

Once you are in, you will need your CSN and FIN number to login.

Your CSN number will be on your SmartShares monthly statement, check your email. Your FIN was sent to you by mail when you first joined SmartShares. If you’ve lost it, you will need to contact Link Market Services to get a new one send to you by mail (I mean physical mail). They will NOT give out FIN over the phone or email.

Once you logged in, you can see your account info. (I will be using my son’s ETF account here.)

The next part is the breakdown of your current holding. It will show the fund, Units of ETF, the stock price of ETF, the current value of your holding and your current monthly contribution amount. You can change your monthly contribution amount here.

You can also make a lump sum contribution here. The minimum amount is $250.

The next part is the best function of this portal. Existing investors can add new fund without paying additional establishment fee!

What you’ll need to do is click on “Add Fund” and pick the fund you want to add, the initial investment amount (minimum $500) and monthly contribution amount (minimum $50/month). This benefit is only available for existing investor. If you are new investor, you will have to pay $30 establishment fee for once.

If you just need to check your holding value and don’t want to make any changes, you can just close your window or go to another web page (there is no logout button).

If you want to change your contribution amount, make a lump sum payment or add fund, you will have to click next at the bottom of the page and confirm your personal detail.

Conclusion

Overall, it makes sense for SmartShares investors to check and actively manage their holding on SmartShares website (Bye! Link Market Service). The interface is clean and easy to understand. I think its a bit odd to use your CSN and FIN to log in and I imagine some investors will have a hard time to find their FIN number.

The best thing is existing investors can add new fund easily, and don’t have to pay additional establishment fee.

With the new portal, it doesn’t mean it will replace Link Market Service. If you want to check transaction history, you still have to go back to Link Market Service. For other functions, SmartShares investor portal will take care of that.

November 17, 2017 Investing downturn, GFC, mindset, recession Leave a comment

Another market downturn is coming? Now is Time to Start Your Investment

by Alpha

About 10 years ago, a market downturn caused by subprime mortgage crisis in the United States resulted in a global financial crisis (a.k.a GFC). There is a theory that economic works in a cycle, so statically we are due for another market downturn soon. If you haven’t started your investment yet, now may be the best time for you to start now. Yes, you hear me right, start right before the market downturn … just like an idiot.

Jim – Hypothetical Scenario

Jim is a typical Kiwis. He purchased a house at 35 with a 30 years mortgage. Although he is not frugal, he lives within his mean. He’ve got KiwiSaver that he doesn’t pay much attention to and he put all his disposable income on his mortgage. He managed to pay off his mortgage in 18 years, so he moves onto the next logical thing – save and invest for retirement. At age 53 and without a mortgage payment, Jim put all his disposable income into investment. At that time, the market just came out of recession and his investment portfolio (including shares and a rental property on a mortgage) jump to 350k in 7 years. Jim is well on track to have a comfortable retirement in a couple years.

At his 60 years old, a financial crisis hit.

Jim lost his job and struggle to find a job with similar pay. His portfolio drops to 200K in 8 months and he still paying the mortgage on his rental property. His emergency fund is drying up as well due to the mortgage pressure. Every day he saw his portfolio went down a little, his heart sank a little. He can’t stand to watch his portfolio stinking every day, so he decided to cash out. The market down for 3 more months then slowly recover, but Jim didn’t get back into the market.

Jim did the logical thing, focus on paying off his debt then invest for retirement. However, Jim never experiences a financial crisis first-handed. He made the mistake of getting out of the market at a wrong time. If he can get his head down and stay in the market, he should ride out of the downturn and come out on top.

Learn by Failing

Anytime is a good time to start your investment as long as you are free of consumer, debt, joined KiwiSaver and have an emergency fund in place. The reason I think you should start your investment before the market downturn on the horizon is that you needed the experience early on. You need to understand and experience the market will go up, and it will go down. You can read blog and books about what happened in the last downturn, but you don’t know what it’s going to do you mentally unless you have a stake in the game.

By starting your investment before a market downturn, you will have the first-hand experience on what happened during a crisis. You will know what it will do to you when you saw your portfolio is down 50%. Imagine every month you put $500 into an investment, but the value still doing down. You may feel you just dumping cash into a trash can. Should you stop or keep putting money in? You may think you can be logical in this situation, but you will never know what the pressure will do to you.

The other reason to start before a downturn is you want to fail small. Since you are just started, your portfolio should be relatively small. If you did something unwise, it would only hurt you a little. You will learn a lot more from it and try not to reply that in the next downturn

You want to make a mistake and fail when you are young and have $20,000 on the market. So when you are in your 50s, having $300K in the market, you can make a logical decision like an experienced investor.

My Own Fear

I only started investing after the last GFC, so I never experience a market downturn. For the past couple years the market has been up a lot and I were happy to add more money to my portfolio. If a financial crisis hit, I know I need to sit tight and ride out of the recession. However, I can’t be sure if I can stick to my plan.

I read on a forum that a US couple retired with a $4mil portfolio, when the GFC hit, their portfolio dive to $2.2mil. Despite people on the forum telling them they can sit out of this recession comfortably, they decided to take the $1.8mil lost and cash out their investment. I remember the couple said, “I can’t take the stress anymore. I have to get out.” Given people on that forum usually are experienced investors, I am surprised a market downturn can make an investor take a $1.8mil hit. I just don’t know how I will react.

I guess I will have to wait and see.

Conclusion

No doubt there will be another market downturn coming
You should start your small investment now and experience the downturn
Despite you know what to do during a market downturn, you may react differently
Experience a downturn in your early stage, you will gain a lot of knowledge and make you a better investor.
Also, having a small portfolio will limit your losses.
You will be well prepared for the next recession when you have a much bigger portfolio.
You don’t want to be head into the market downturn with lots of money and no experience.

October 31, 2017 Investing adminis, custodial service, Custodian, FMA, investnow, investor protection, public trust, Superlife Leave a comment

Custodian: What is that and How does it Protect your Investment

by Alpha

Here is a frequent question from anyone who is interested in investing:

“If I put my money in XXX, how do I know if they won’t take my money and run away? What will happen to my money if XXX went out of business? Will my money go to the creditors? ”

It’s a legitimate question especially after those financial companies collapse and many kiwis loss their life saving over it. Currently, the standard practice for an investment company to protect their client’s asset is to use a custodial service. We are going to look at what is a custodian and how does it protect your investment.

I am not a legal expert so the information below could be incorrect. Always do your own research before you invest.

What is Custodian?

Under Financial Advisers Act, a custodian is a financial service provider who holds, transfers or makes payments with client money or property, on behalf of the client.

A custodian is required to register on Financial Service Providers Register. Their account need to be audited by a qualified auditor every year and a copy of the report will send to Financial Markets Authority. They also required reporting all client transactions at least twice a year to their client.

The custodian is usually independent of the Fund manager or investment service provider. David Campbell, former head of custody of Public Trust and current head of custody at Adminis Limited said, “Adminis holds all client assets on trust in a dedicated custody account. This ensures that there are complete separation and segregations between fund manager as a business, and their clients’ assets. This means that fund manager can’t touch or control client assets in any way.” Adminis provide custodial service for InvestNow.

Follow the Money

Lots of investors don’t know their money and investment are actually held by the custodian, not with the investment company.

For example, you decided to put $1000 in Superlife to invest in NZ Shares Fund. When you deposit the money, you are not paying into Superlife’s operation account, your money is held by their custodian, which is Public Trust. Superlife will tell Public Trust to use that $1000 and buy NZ Shares Fund. The only money goes to Superlife’s bank will be the admin fee and management fee.

The assets are held in custody, and the investor is recorded as the ‘beneficial owner’. This ensures that investor owns the asset, and also that there is complete separation of client assets from SuperLife – if SuperLife is not around, investors’ asset would still be held by the custodian, and the investor would still be recorded as the beneficial owner.

How does it Protect your Investment?

Since the fund manager and investment service provider didn’t hold investor’s asset, the asset is safe from the collapse of the fund manager.

If the investment company poorly runs, owe lots of money from different creditors and went out of business. All asset within the investment company will be sold to repay the creditors. Since the client’s asset are held by the custodian, they are a different legal entity, investment company’s creditors cannot access to their client’s money. So your investment will be safe from investment company collapse.

Also, the fund manager cannot transfer client’s name into their own bank account because they have no control over the asset. The fund manager can’t run a ponzi scam with custodian controlling the asset.

One of the largest Ponzi Scam in New Zealand – Ross Asset Managment was running by an Authorised Financial Advisers who did not use a custodial service, held all client’s asset on his own and ran a ponzi scam from his office.

Custodian is required to be audited by an independent qualified auditor annually. So it will reduce the risk of misconduct at custodian side.

What if Custodian went out of business?

You may worry if the custodian itself is poorly run and went out of business, their creditor can get their hands on your asset. Afterall, the custodian is holding your asset, right?

Not really, the custodian is actually hold their client’s asset in an another separated legal entity. It will protect your asset from custodian creditor.

Here is a real-life example. Adminis provide custodial service for InvestNow client. InvestNow’s clients’ asset is held on trust in Adminis Custodial Nominees Limited. That nominee limited does not have revenue, staff and expenses. So that company will not generate any debt and its separated from Adminis daily operation.

If Adminis goes out of business, Adminis creditors can only get Adminis’ asset, they can’t get Adminis Custodial Nominees Limited asset.

No Guarantees

Custodian is NOT a silver bullet for the financial scam, but it adds a layer of protection for investors from creditors. It makes harder for rogue fund manager or financial service provider to misplace your money and reduce the risk of misconduct.

Custodian would not protect your asset if the fund invested in junk asset or some highly speculative asset. You will still have the risk of losing your money in a bad investment decision.

If you decided to invest in a high-risk fund that focuses on cryptocurrency, and the fund manager decided to put all client money into PonziCoin. (Yes, that’s a real cryptocurrency) The custodian will use your money to invest on PonziCoin under fund manager instruction. If the PonziCoin value drops to nothing, you will lose the value of your investment. Custodian will not protect you from that. Always make sure you understand what asset you are invested in and the risk involved.

Who is using Custodian?

According to FMA, all licensed managed investment scheme managers, whether for a KiwiSaver scheme or any other type of managed investment scheme, have to ensure that a scheme’s money and property are held at arm’s length by the independent supervisor of the scheme or a custodian approved by the supervisor.

So all of your KiwiSaver providers are held under a custodian. For those non-KiwiSaver investments that I’ve been recommended from Superlife, SmartShares, InvestNow and Simplicity, they are all using independent custodian service to hold their client asset as well.

SmartShare ETF investment use custodian to hold your money for a short period of time between 20th of each month to 1st of next month. After that, they will use your money to buy the ETF, and the ETF will be under your own name.

Sharesies, the new investment start-up in Wellington, currently is not using an independent custodian service. According to section 16 of their terms and condition, Sharesies is holding investors’ asset with Sharesies Nominee Limited. That entity is separated from Sharesies Limited but fully owned by Sharesies and share the same directors.

Conclusion

The most fund manager, KiwiSaver provider held investor’s money and asset with an independent custodian.
An asset in held under independent custodian is separated from Fund Manager’s asset. In the event of fund manager bankruptcy, the creditors cannot access the asset under custodial control.
It will be hard for a fund manager to misplace the fund as they don’t have direct access to their client’s money.
Custodian is required to be audited by independent qualified auditor every year. The audit report will send to FMA.
Custodian will further separate client asset by putting them in a non-trading nominees entity to protect from their own creditors.
Custodian will reduce the risk of misconduct from the fund manager. It will NOT protect the investor from asset devalue.
Always make sure you understand what asset you are invested in and the risk involved.

Special thanks to Anthony from InvestNow and David from Aminins answered some of my questions.

October 26, 2017 Investing, KiwiSaver Bonus Bond, Children, Kids 4 Comments

The Best Way to Invest for Your Children in New Zealand – Other Options

by Alpha

This is the part 3 of my investing for kids series. We’ve talked about what you need to prepare and what is my fund recommendation. Now in part 3, we will look at some other investment options for kids.

Term Deposit with Bank

One of the most popular investment options of kids is savings and term deposit in Bank. It is simple, easy to understand, easy to set up and very safe investment. However, since most of the kid’s investment a for the long term, I think bank deposit is just too safe for that time frame. I believe kids can take up more risk than a term deposit. The average return on term deposit was around 4-5% and now is around 3-4%. The long-term return of stock market is about 6-7%.

Here is an analysis comparing the return on term deposit and stock investment for 14 years (March 2003 to Aug 2017). I used historical retail term deposit return from RBNZ and compare to NZX50 index return. I ignored dividend in NZX50 for the ease of calculation. In reality, NZX return will be higher if we included dividend reinvest. Monthly contribution is $50. Tax rate at 10.5%.

As you can see, the after-tax return on stock and much better than term deposit in a long run. The share took a dip during GFC in 08-09, and the performance is actually lower than the term deposit. However, it quickly recovers and suppresses bank deposit. In the end, stock overperformed by 57%.

Investment Fund with Bank

Here is a quote from a reader.

“Thanks for the recommendation on your blog. However, I’m concerned the safety of those investment companies. How do I know if they will take my money a run away? Is there any investment with a reliable provider, like a bank?”

Well, a lot of people concerned about those investment service providers is running a Ponzi scam. I’ve done some research on that area, and I am personally are satisfy with the result before I recommend them. We will look into how safe is your investment in another blog post.

Most of the retail bank in New Zealand offers investment product for kids. However, the fees they are charging are much higher compared to my recommendations. Most of the management fee is average at around 1%-2%. They also have a higher initial investment requirement, higher lump sum investment amount. They will charge a to put money into their investment and charge another fee when you want to take your money out. Some of them have performance fee as well. All of those are just too high for my preference.

However, if I have to pick one, I will recommend ASB investment fund. ASB Investment funds management fee is at the low end amongst retail banks. They mostly invested in low-cost passive index fund from BlackRock, and that’s why they can offer a lower fee. Please make sure you understand their fees structure before you join.

Invest in Adult’s Name

Invest in Adults name is a simple and easy solution. The good thing is you will not be limited by the age restriction from many investment services, and you are free to invest in anything. However, as I pointed out early, the investment return will be taxed at your own PIR rate, so that is not tax efficient.

Here is an example of the same investment with the different tax rate.

SmartShares

When you sign up for SmartShares contribution plan, there is an option for you to sign your kids up for some SmartShares. However, SmartShares is a listed-PIE fund, and all investors got taxed at 28% regardless your PIR rate. So SmartShares will be tax ineffective for your kids.

However, if you already using an accountant, you can get them to claim those tax back.

Ruth from thehappysaver.com wrote two excellent blog posts on putting her kid on SmartShares. Check it out.

SmartShare for Kids part 1 and part 2

Buy Share on Share market

Another common way to invest for children. The Mum/Dad buy shares in some company under their kid’s name. It is great especially if you are already familiar with stock trading. You can also buy SmartShares ETF directly on the stock market which makes it a great options.

However, there is a cost everything you buy or sell on the stock market, so that is not good for regular or small amount investing. Also, you are supposed to pay tax on your dividend received. So there is some added work to do.

KiwiSaver

KiwiSaver used to be top investment choice for your children as they used to be $1000 kick-start and member tax credit for kids. However, our government had taken those benefit away, and the only benefit for kids join KiwiSaver is they will have lots of choices to participate with no limitation. For example, if you want your kids to join the investment fund from Simplicity but they won’t accept under 18 years old, you can get your kids to join their KiwiSaver.

However, the significant disadvantage of KiwiSaver for kids is the limitation on how and when they can use that money. Currently, They can only get the money out to buy their first home, or they turn 65. So it limited how your kids can use that money. They can’t use that for study, can’t use that for OE or start their own business.

If you already started KiwiSaver for your kids, you should keep your money there and let it grow. You don’t have to put more money in until they turn 18 years old.

If you haven’t started, invest your money outside KiwiSaver. Only get them to join once they turn 18.

Bonus Bond

Another favorite gift for kids. Bonus Bonds were first introduced by the Government in 1970 as a way of encouraging New Zealanders to save more. However, people need to understand this.

Bonus Bond is NOT an investment. Bonus bond is merely a placeholder for a lottery.

Bonus Bond pays no interest or dividend. It is highly unlikely your kids will get that million dollar price from them. So if you have the money, you will be better off to keep it in the bank where you can earn interest.

If your kids got them as a gift, you should accept it and understand your kids have a placeholder for a lottery. If your kids have over $100 in bonus bond, you should cash out down to $100 and try your luck.

Conclusion

A term deposit is a safe investment, but the return is too low.
Investment product with big banks are subjective safer for some people but comes with a higher cost and more limitation.
Invest in Adult’s Name is simple and straightforward. Also, it will have a lot more options available. However, you will pay more tax then you suppose to.
Buy shares on share market is not ideal for regular or small sum investing due to the cost of trade on each transaction.
KiwiSaver will have more investment options for kids. However, it limits how they can use that money.
Bouns Bond is NOT an investment. It’s merely a placeholder for a lottery. Don’t put more than $100 in there.

SaveSave

October 3, 2017 ETF, Index Fund, Investing investnow, Sharesies, SmartShares, Superlife Leave a comment

Fund Update: Regular Investing with InvestNow, Cheaper SmartShares and More Funds in Sharesies

by Alpha

Got a couple fund updates in October 2017 including regular investing with InvestNow, cheaper SmartShares management cost, more fund options in Sharesies and new fund with Simplicity.

Regular Investing with InvestNow

InvestNow just rollout their regular investing options. Yay! Before that, every time investors transfer money to InvestNow, the money will be sitting in their “Transaction account”. The investor was required to log into their account and manually invest that money into funds. Not very robust.

Now with regular investing, you just need to instruct InvestNow how you want your fund distributed once and they will do it automatically. Also, with regular investing, the minimum transaction amount is lowered to $50. Here is how it works.

Once you login to InvestNow, you will see a new option called “My Plan”.

Click create to start a new plan.

You decide how much you want to invest and how frequently. You can invest on a weekly, monthly, quarterly or six-monthly basis. Also, you can choose when the plan start and end. Below is an example for $100 invested monthly with no end date.

Next is to instruct which fund you would like to invest by percentage. The minimum investment amount for a single fund is $50/transaction. If you are investing $100, you can invest in 2 different funds at $50/each or $100 in a single fund. Below is an example for $100 invested into two Vanguard funds.

After that, click save and you are done. Make sure you set up an automatic payment from your bank!

I am glad InvestNow introduces regular investing options and lower the transaction amount to $50. It makes it easier for investors to set up automatic payment and use the dollar-cost averaging method to invest. It further lowers the barrier of entry and makes InvestNow be a “set and forget” investment solutions.

Check out their Regular Investment Plan page for more info.

Just be aware that minimum lump sum investment amount is still at $250/transaction.

InvestNow buy RaboDirect’s managed funds line

InvestNow just announced they acquired the Managed Funds product line of RaboDirect. RaboDirect started a marketplace for investment funds in 2006. In fact, the InvestNow’s managing director, Mike Heath, set up RaboDirect’s platform back then.

Now InvestNow acquired the Managed Funds product line from RaboDirect, their customer will transit to InvestNow platform.

I think it’s great as RaboDirect customer get to stay in the same fund and will save more on fees because InvestNow does not charge admin or transaction fee. It will also expand InvestNow customer based. I hope it will lead InvestNow to bring more high quality and low-cost index fund to New Zealand like Vanguard and Blackrock.

Check out my blog on InvestNow here.

Investnow – Invest in Vanguard Fund with 0.20% Fee

InvestNow Added SmartShares ETFs into their Offerings

Smartshares reduces fee on award-winning ETF

SmartShares’ NZ Mid Cap ETF recently won the New Zealand Equity Sector Fund of the year at the 2017 FundSource Awards.

The NZ Mid Cap ETF tracks the share price of 38 New Zealand Stock and its median market cap at 1,090 million. The index is made up of top 50 companies in NZ stock exchange but excluded the top 10 companies and product issued by non-New Zealand issuers. You can find the stock of The A2 Milk Company, Xero, Air New Zealand, Mercury, Mainfreight and Port of Tauranga in this ETF.

Here is the sector breakdown on Mid Cap ETF.

SmartShares just lower their management fee from 0.75% to 0.60%. So this is good news for their current investors. This ETF used to have the biggest cost difference with their ETF fund counterpart in SuperLife. Now the cost is more in line with SuperLife ETF fund. However, SuperLife still has the lower management cost at 0.49%.

Check out my comparison on management fee between SmartShares and SuperLife.

Sharesies added New Socially Responsible Funds

Sharesies, the new Wellington start-up, just added two socially responsible funds from Pathfinder Asset Management. They are The Pathfinder Global Responsibility Fund and the Pathfinder Global Water Fund.

Socially responsible investing also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social good to bring about a social change. Those funds will invest in companies practices that promote environmental stewardship, consumer protection, human rights, and diversity. They avoid business involved in armaments, gambling, tobacco, thermal coal and pornography.

Pathfinder Asset Management said Environmental, Social and Governance (ESG) scores as one of the factors to invest with those two funds. Pathfinder Global Responsibility Fund targets 250 stocks from around the world and Pathfinder Global Water Fund target on 50 to 100 companies that generate significant income from water-related activities. Both funds are actively managed, and the management cost is 0.93% and 1.3% per year. Also, those two funds have a transaction fee on buy and sell of 0.05%. So if you invested $50 in either fund, $0.025 would be charged as a transaction fee.

I think Sharesies did a great job adding socially responsible funds on their platform as the fund will appeal to their core customers. However be aware of those two funds are actively managed, and there is a transaction fee on buy and sell.

Check out the fund info here. The Pathfinder Global Responsibility Fund and the Pathfinder Global Water Fund.

One More Thing

One last thing, Simplicity added Guaranteed income fund and I’ve got a sperate blog on that.

September 29, 2017 Investing, KiwiSaver Annuity, Lifetime Income, Retirement, Simplicity 1 Comment

Simplicity Guaranteed Income fund, What’s that and How it Works?

by Alpha

Simplicity, the non-profit and low-cost KiwiSaver provider introduced a new fund last week called “Guaranteed income fund.” Guaranteed income investment products had been around for years in other overseas markets, but it’s very new to New Zealand. So in this blog post we will look at what is guaranteed income fund, how does it work, the pros, the cons and do you need it.

What are Guaranteed income fund and annuity

The guaranteed income fund is basically an annuity. They provide a stable and secure source of retirement income. You will need to surrender a sum of money in exchange for a stream of income that’s guaranteed for life. The annuity has been around for a very long time in the overseas market. Usually, annuity service is offered by an insurance company because there is a guaranteed element in this product. New Zealand just had our first annuity service from LifeTime Income Ltd not long ago.

How does it work?

Simplicity now partners with Lifetime Income Ltd and provide a guaranteed income fund that offers 5% guaranteed return at age 65 for the rest of your life. The minimum amount is $50,000, the annual cost is $30, fund management cost is 0.31%, and insurance cost is 1.3% of your protected income base. Protected income base is your initial investment if you start receiving cash payment immediately. If you decided to delay receiving the cash payment, your protected income base would be either your initial investment amount or the current fund value, whichever is higher. We will explain that later.

You can think of it as you borrow some money to another person. That individual will keep paying you interest at 5% for the rest of your life.

Here is an example of how it works. Assume you are now 65. You decided to put $50,000 into Simplicity Guaranteed income fund and start receiving the cash income immediately. Every year, you will receive 5% of that $50,000, which is $2,500. It will payout fortnightly at $2,500 / 26 = $96.15 for the rest of your life. The $50,000 are still with Simplicity as an investment. That money will continue increase or reduce according to how the investment market performs, tax and fee charges. The cash you receive will also come from that fund as well.

Here is a simplified calculation

Your capital + gain or loss from investment – tax – annual fee ($30) – management cost (0.31%) – Insurance cost (1.3% of initial value) – cash payout (5% of initial capital) = end balance

Apply that to our $50,000 example with 6.5% return, Taxed under FDR rule with PIR at 17.5%, here is the performance for the first year.

Initial Capital $50,000 + Investment return $3,250 – Tax $465.94 – Annual fee $30 – management cost $163.63 – insurance cost $650 – cash payout $2,500 = End year balance $49,440.43

Here is the performance for next 25 years with the same return at 6.5%

Here is the graph of your fund value over the years.

What if my fund runs out?

As you can see with 6.5% return, your fund value will keep going down, and you will run out of money some day. If your investment fund is exhausted, there will be no money to draw from. At this point, the insurance policy will take over and pay out that guaranteed amount ($2,500/year) for the rest of your life. That’s why there are a 1.3% insurance charges on the fund.

Now I will use the same example but lower the return on investment to 2.5%.

Your investment fund exhausted age 82. You can only draw $1,495 from your fund at that year. The insurance company will pick up the tap and continue to pay the guaranteed income for the rest of your life.

Here is a closer look at guaranteed income. Insurance policy kicks in at age 82 and continue.

Can I delay and get more Cash Payout?

The 5% is the minimum income guarantee. It goes by 0.1% each year that you defer taking out the guaranteed income. When you start getting the income at 65, the guaranteed rate is 5%; if you start getting it at 70, the guaranteed rate is 5.5%. It tops at age 90 with 7%. The money in the fund will increase or decrease with the investment return but there is no cash withdraw.

Here is an example when you join at 65 but only start to get income at 70 and get 5.5% guaranteed income.

What if the receiver pass away?

If the receiver passes away, whatever left in the account will be passed on to their estate. Now, let’s go back to our 2.5% return example.

If the receiver passes away at age 77, there are still $16.962 capital in the account. That amount will pass onto receiver’s beneficiary. On the other hand, if the receiver passes away at age 86, there will be no money left in the fund. So there will be no money to receiver’s beneficiary, and the insurance payment will stop.

What so good about Guaranteed income fund

Imagine you are now retired and you only living on superannuation plus your saving. Every time you spend money on the power bill, water and food, your retirement saving go down a little bit. Do you worry you may outlive your retirement savings and have to live on superannuation alone? This is a real concern for many retirees and it reduces their spending in retirement years.

Below is the typical situation for New Zealand retiree. Their retirement is partly funded by superannuation and their own savings/income to reach their ideal standard of living.

Since we don’t know how long we are going to live, some retirees worry they may outlive theirs. So they reduce their spending and stand and hope the saving will least long enough. The living standard reduced as a result.

Since guaranteed income fund and annuity provide a steady stream of income for life, it is a powerful tool for retirees. You can surrender part of your retirement saving and exchange for a guaranteed income for life. Add that on to superannuation from the government, you will have a bigger part of fixed income every fortnight. So it will help to bridge the gap between your living expenses and superannuation. Also, It will reduce the concern if you will out the saving. The most significant benefit its gives you the certainty that you can always fall back to Superannuation + guaranteed income level.

What are the Limitation & Risk

There is always a catch with investment and insurance products. There are certain restrictions and risk regarding guaranteed income fund.

KiwiSaver Only – currently this fund is only open to the KiwiSaver member. If you are not eligible for KiwiSaver or you already left KiwiSaver, you can’t join the fund. Also, you’ll have to be 65 to start receiving a cash payment. Alternatively, you can get the annuity from Lifetime Income with a higher cost.

Fixed amount – It is great that you will have an income for the rest of your life. However, that amount is set for life as well. So inflation will be your biggest problem. With inflation, the same amount of money will have less buying power. In the early 2000s, the price of petrol was well below $1. I can fill my tank for $30-$40. Now, I can only fill 60% of the same tank with $40. Here is a table of the real value for $2500 after 2% inflation. 10 years in at age 75, that $2500 will worth about $2000 today, it lost about 20% of its value.

Since the cost of living and superannuation are rising along with inflation, you will have to fund more of your living expenses out of your retirement savings. Just like the graph below.

However, people tend to spend less as they age. Although the cost of living increased, the cost for an ideal living standard will decrease and it softens the effect on inflation.

Cost: This fund is very similar to Simplicity balanced fund and they have the same admin fee and management cost. However, guaranteed income fund have an insurance policy attached to it and it cost 1.3% of your initial fund amount. No matter how your fund performs, it will charge the same amount of insurance fee.

Insurer risk: Since this fund has an insurance policy, there is always the risk of insurance company collapse. The insurer is Lifetime income limited, which is not a big insurance company like AIG.

Access to fund: You will need to surrender a large sum of cash to the investment provided to start your income guaranteed fund. There are limitations on how you can withdraw your fund from the plan. First, your fund may not have enough money due to the fees and investment return. If there are fund to pull out from, you can either withdraw up to 20% of your fund and take a pay cut by the same percentage you took out. The other options are completely empty your fund. The good thing is Simplicity will not charge a fee on that.

Do I need it?

I think it’s great that there is one more option for New Zealand retirees with Guaranteed Income fund. It will reduce the concern of retirees outlive their savings and provide a fallback for them if they have to scale back their spending.

Make sure you understand Guaranteed Income fund is just one of the many options for retirees and you should not put all of your eggs in one basket. I will include them as part of the retirement plan along with term deposit, investment fund or property and superannuation.

The key point is you should not put all of your money into Guaranteed Income fund and annuity. One way to work out how much guaranteed income you’ll need is to decide how much income you wish to be guaranteed along with superannuation income.

For example, a married couple will get $1200.60 each fortnight. They also worked out their ideal living standard will cost them $2350 each fortnight including nice food, shopping, dining out, travel and avocado on toast every Sunday. On the other hand, we can cover their basic expenses (power, water, communication, petrol and basic food) for $1500 each fortnight.

If the couple wants to the guaranteed income cover their ideal living standard, the guaranteed income needs to be $2500 – $1200 = $1300 each fortnight. To get that amount of guaranteed income, the couple will have $1300 x 26 / 5% = $676k in the fund. That is not a small amount for most people.

How about we just need to cover the basic. The guaranteed income will be $1500 – $2500 = $300 each fortnight and the fund value will be $300 x 26 / 5% = $156k. This amount is not too big and seems reasonable to average retirees. It will cover the basic for the couple at their early stage of retirement. They will be happy to know if anything happens that cost all of their life-saving, they will still have enough to cover the basic living with superannuation and guaranteed income. They can even increase the fund value to hedge against inflation.

Conclusion

Simplicity offer Guaranteed Income fund for the KiwiSaver member.
The investment fund is similar to Balanced fund with $30/year admin fund, 0.31% fund management fee and 1.3% insurance cost based on the initial fund value.
Investors will receive 5% of the initial fund value as cash payment every year from 65 for the rest of their life.
The cash payment is drawn from your investment fund. If the investment fund runs out, an insurance policy will kick in and provide the cash payment.
This is a great option (in combine with superannuation) for retirees to set a safety income line.
Do not over commit. This fund should be part of your retirement plan along with superannuation, term deposit, and other investment.

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