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The importance of being prepared…

Kale 0 Comment

The importance of being prepared…

As financial advisers, a huge part of our role is helping people plan… plan to buy a first home or an investment property, plan for retirement, plan for financial decisions such as starting a business or family, and just as importantly, plan for when things go wrong…

I know it’s not fun to think about what would happen if we died, or became disabled or seriously injured, or diagnosed with cancer or a major illness. I personally spend way too much time dreaming about what I would do if I won lotto, the reality is I have a 1 in 383,838 chance of winning… however I have a 1 in 4 chance of being diagnosed with cancer, ugh grim I know.

It’s no secret many of us Kiwi’s are guilty of having a “she’ll be right” attitude, and whilst sometimes ignorance may be bliss, the fallout of not being prepared can be catastrophic, especially for our loved ones.  So, let’s get real and have the hard conversations…

So what does it look like if we die prematurely and are unprepared…

One of the most important things you can do, which is often ignored or put in the too-hard basket is estate planning.  This includes things such as wills, trusts, and enduring power of attorneys.  For most people it is as simple as having a will in the event you were to pass away.  So, let’s look at what happens if you die without a will…

If you die without a will, it is called dying intestate… As an upfront and honest person, I am going to be blunt, dying intestate and leaving your loved ones to navigate that process and pick up the pieces after losing you is a serious stitch up, and makes an already horrific thing that much worse.

If you have assets worth more than $15,000 (that includes things like KiwiSaver), your estate must go through a legal process and be distributed as per NZ law, this can take anywhere from 6-24 months.

Once the court has appointed somebody to administer your estate, they then have to figure out how to get affairs in order, i.e. clear or close debt, pay bills, close bank accounts, close and cancel utilities and services, gym memberships, phone plans, and so on.  Even things like accessing social media accounts can become a nightmare. 

Then it comes to distributing the estate, without a will this is done in accordance with NZ law and dependent on your situation.  Are you single, in a relationship, have children etc?  You can find out more about how this is distributed here

Now I would be lying if I said wills were perfect and fool proof, because they aren’t.  They can be argued or challenged in court and can still become complicated in some instances, but most of the time they are pretty seamless and having one is always so much better than not.  

Let’s look at an example and the difference that being prepared can make…

John and Jane are in their late 30’s and have two young kids.  John is the main income earner as Jane looks after the little ones.  They own their own home, have exciting plans for their future and life is good. 

Scenario 1

 John unexpectedly passes away.  John and Jane never got their wills sorted or spoke about what would happen if either of them were to pass away. John does have life insurance, but Jane unfortunately isn’t a policy owner so cannot access the funds and it is instead paid into his estate.

Jane deals with the loss of her husband, whilst looking after the little ones.  As John’s income has stopped but Jane cannot just access his life insurance or estate, she must figure out how to come up with the money to pay the mortgage or risk losing the house that she and John made their home.

It takes 10 months for John’s estate to be administered and distributed, and for Jane to be able to access any of the funds.  Jane went from a stay-at-home wife/mum to a single mum working part-time and relying on financial support from friends and family to get by.

Scenario 2 

John unexpectedly passes away.  Jane owns John’s life insurance policy and can claim against his insurance, providing her with immediate financial relief.  She has the funds for his funeral and to cover the mortgage and household expenses for the next 5 years. Jane can go through the grief of losing her hubby without the added financial stress. 

John and Jane had wills in place and his entire estate was seamlessly transferred to Jane within a few weeks.  Above that, John had made sure that if anything ever happened to him, Jane would have everything she needs to make things as stress-free as possible.  He had all the information about their financial affairs in one place, he kept a log of passwords for everything, and he even had funeral instructions that Jane could follow.

This “example” is something we see all too often, and the key difference is literally just having a will, some good insurance advice, and some forward thinking. 

Hopefully, you’re picking up what I’m putting down here…. It PAYS to have a plan. 

So how do we recommend you start to get your affairs in order?

  1. Chat with our team… At the Money Men, our mission is not to just provide financial advice but to educate and empower our clients. There are lots of great advisers out there that will have these robust and detailed “what if” conversations, but there are also plenty that will just sell you an insurance policy and be on their merry way… It’s important to find an adviser that is going to really understand you, and the risks you may face and who takes the time to facilitate and drive these conversations.

  2. Get legal advice… Seeing a lawyer can sometimes be daunting, mostly because they can be expensive. Do some research and find a practice that works for you. There are plenty of law firms that will give you upfront costs and not charge for every phone call.  You can expect to pay roughly $400-$600 for a straightforward will.  If you have a business or need to establish a trust, then there are more costs but think of it like this… the more complex your situation the more likely you are to be doing something right and the more you have to protect.

  3. Check out My Will Wishes… We came across Anna’s My Will Wishes book and can’t speak more highly of it. It’s the perfect missing piece of the puzzle people need to get down all the important things that don’t go into a will.  Having something like this makes an enormous difference in helping loved ones through their loss and allows you to have a say in what you would want. We give all our clients a copy of this when sorting their insurance and the feedback we get is amazing!
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How to do KiwiSaver right!

Kale 0 Comment

How to do KiwiSaver Right!

Your 65 Year Old You Will Be Thankful.

How are you planning to fund your 29 years of retirement?

Statistically, we’re living much longer these days – men can now expect to live until they’re 90, and women until they’re 94. So considering we could be retired for 30 years, we are going to need some money coming in.

So, how do we keep our cushy lifestyle in tact as we start to put down the tools? From the age of 65 most New Zealand residents receive the NZ Super every fortnight. A great start, but it’s likely that the Super rate won’t be enough – let’s look at some figures;

What will I get from my Super?

The new NZ super rates were released in April – which now makes the magic number $437 p/w for individuals ($22,724 annually). Keep in mind, that is the maximum you can receive from our pension scheme per person. If you are married, in a civil union or a de facto relationship and both qualify – it might be even less (see latest super rates here).

Getting Kiwisaver right now has the potential to add hundreds of thousands of dollars to your retirement years with very little work. We see too many people wait too long to begin thinking about their retirement – it’s easy to do, we know. “Oh that’s ages away” or “ Live while you’re young” – well the reality is – too often those quotes turn into “Man, I wish I sorted this earlier” and well, you need to live while you’re old, too.

All that being said, we are beginning to see a change in interest from the general public. More and more people are wanting to talk about their Kiwisaver. Why? Because their funds are growing – we see it every day and as that happens, people realise just how powerful and significant this tool can be for them.

Enter KiwiSaver

For most of us Kiwisaver is the biggest, easiest and most affordable opportunity to prepare for our elder years. The voluntary savings scheme established by the government to be an easy way to save for our retirement years, but it actually acts as a personal investment fund (yes you read that right – not a savings account but an investment fund).

Getting Kiwisaver right now has the potential to add hundreds of thousands of dollars to your retirement years with very little work. We see too many people wait too long to begin thinking about their retirement – it’s easy to do, we know. “Oh that’s ages away” or “ Live while you’re young” – well the reality is – too often those quotes turn into “Man, I wish I sorted this earlier” and well, you need to live while you’re old, too.

All that being said, we are beginning to see a change in interest from the general public. More and more people are wanting to talk about their Kiwisaver. Why? Because their funds are growing – we see it every day and as that happens, people realise just how powerful and significant this tool can be for them.

So, how do you know you’re in the right fund?

First and foremost; ask yourself if you’ve ever had advice. And we mean real, professional advice. Not, “do you want to see your fund on your banking app” advice. Getting professional, unaligned advice will help you establish your ambition and land in a fund* that reflects it, with a provider* that shares your values.

  • Provider:
    The establishment that manages the fund.
  • Fund type:
    Default | Conservative | Moderate | Balanced | Growth | Aggressive

Don’t know where you fall? That’s okay, time to take action.

Quick last point… what is unaligned advice?

It’ll usually come from a 3rd party group or someone who doesn’t manage the product themselves so they have the ability to look at the market. 

Historically kiwis have entrusted the bank with the majority of their financial lives – this really shines through when we look at how many people still have their kiwisaver with their bank. We think that should change. Generally speaking, the banks aren’t the best place to be.

Like any product provider in any sector – They can only sell their own product. It’s highly unlikely that when you go into the bank the nice young lady/fella behind the counter will tell you that their competitors are performing better, so go down the road and chat to them.

Our final 2 cents…

We’ll make this quick and easy to digest;

The sooner you get it right, the better.

The right fund + time & the power of compound interest = Happy, financially free old kiwis.

Don’t let 65 year old you down.

The Money Men.

Want to learn more about KiwiSaver?

Let us know a bit about you and how we can help you – and we’ll be in touch as soon as we can!

Featured Industry Updates Uncategorized

April-May Industry Updates

Kale 0 Comment

April-May Industry Updates

Welcome to our April Newsletter

 

Each month, we’ll be digesting market news and sending you our best summary – so you can keep your finger on the pulse and only read what’s relative and important.

There is already lots of information out there, so we don’t want to regurgitate it all for you – but we will aim to translate it in plain English and actually tell you what it means and how it might affect you, so you can make better, more informed decisions.

And of course, we are always here if you want to chat about anything in more detail.

What a month to start on, we have a lot to unpack and to say there have been some changes in the property market lately is an understatement. 

It’s very difficult to argue that house prices are increasing at a sustainable rate and that the massive increase in values across the country will continue forever.

No one is denying that.

We cant help but feel that investors have become the punching bag for the bigger problems associated with housing affordability which is that we simply can’t build enough houses and haven’t
for decades.

The cost of construction and red tape seem to be the biggest hand break.

Our issue with these changes is that the property investors that we see on a daily basis are really hard working Kiwi’s trying to get ahead by investing in property and that these changes announced on the 23rd March could have a significant impact on them.

80% of investors only own one property but it seems like the picture the Government is painting is that an investor is someone driving around in a Bentley.

Let's have a look at the recent changes in the Property Market...

The Government is giving $3.8 billion towards housing supply and infrastructure which is
great, we just hope it gets actioned.

Brightline test increased from 5 years to 10 for investment property.

New builds remain at 5 years.

First Home Grants have had the price and income limits increased to try and make it easier for First Home Buyers to qualify for the grant.

First Home Grant Income cap lifted from $85k to $95k for an individual and from $130k to $150k for a couple

Auckland cap on the value of a property has gone up for new builds from $650k to $700k and for existing property from $600k to $625k

The removal of interest deductibility for investors which means they can no longer offset their interest expense against their rental income

This applies from 1 st October and will be retrospectively applied to existing investment properties over the next 4 years

All the points above have a relatively minor impact.
But the removal of the interest deductibility, that came out of left field and its those mum and dad investors hard in the pocket.
Here is an example:

Lets assume you have an interest only mortgage of $500k at 2.29%

$40k rental income received less

$5k for insurance and rates less

$11,450 in mortgage interest cost for $500k mortgage

$23,550 is your taxable income from the property

$7,771 is the tax you would pay prior to changes for this taxable icnome (assume 33% rate)

$3,779 is the new tax you would pay on the mortgage interest

$11,550 is the total tax if you purchased after 27th March

Let us know if you would like a copy of our New Interest Tax Calculator.

Unfortunately, when any cost in a business increases business usually pass on some of that cost to the end user.

The end user in the property investor market is people renting. Tony Alexander, who is arguably the best independent economist in the country, surveyed 1,700 landlords to see if they will increase their rents due to the next tax rule. 73% said they intend to increase rents to allow for the new changes.

Unfortunately the Governments plan to help First Home Buyers is going to be costing those that are saving to enter the market more money making it harder to get the deposit together.

One important point I haven’t seen a lot of media attention focused on is how the banks are going to allow for this increased costs to investors when they are calculating how much lending someone can borrow.

It seems obvious to me that given the significant increase in cost that the banks will come out shortly with new credit policy to take this additional cost into account which means it will reduce the amount of money investors can borrow and could be enough to move some more highly leverage investors into negative servicing.

It all sounds pretty negative for the investors out there getting hammered by Government policy but if we take a deep breath property prices have increased by 35.8% over the last two years as a national average as of Feb 2021 and with interest rates at record lows there is still a very good argument for investing in property and continuing to invest in property.

It will remain a solid investment and the main reason for sharing the above info is to give a heads up to our property investor clients out there that these changes are significant to cash flow and you want to make sure you are aware of how it could affect you.

Don’t make any rash decisions around exiting the market. Be proactive with planning for these tax changes and any future possible changes – we are happy to help.

It’s important to realise that the interest deductibility changes have not become law just yet and needs to get past consultation with Treasury and IRD.

Below is a quick summary on some other points of interest:

House prices:

Disruptive changes like this in the housing market always cause people to sit on their hands while they wait for the dust to settle.

We don’t expect to see house prices fall out of the sky but do expect them to slow due to more highly leverage investors leaving the market and therefore less competition. General expectations still seem to be that property will increase by about 10% over the next year instead of at the current rate which is about 25% so don’t expect to see houses get cheaper!

Demand for property is the main driver for why prices will continue to increase

First Home Buyers:

With less investors in the market for those lower entry properties that first home buyers are after there will be a less competition which is great for First Home Buyers.

Saving the deposit will continue to be the biggest hand break, especially now with increases in rents on the horizon.

Increase salary and house price caps for the First Home Grant might help out some people.

New build properties:

There will be a push towards building new for investors which is what the Government wants.

They are exempt from LVR rules so you can buy with 20% deposit instead of 40%.

You are allowed to deduct the interest as an expense (so pay less tax).

Bright line test remains at 5 years instead of 10.

This will push up the price of land as investors move to secure land over existing housing stock.

Construction supplies will be interesting to watch.

Note: banks all treat construction lending very differently, let us know if you are thinking of building and we can point you in the right direction.

Mortgage Interest Rates:

Up until these recent changes there were rumours of introduction of debt-to-income ratios and potential removal of interest only lending which now seems to be unlikely.

These changes also lighten the load on the reserve bank to have to step in a do something
like increase interest rates to help stabilise property prices so it seems unlikely they will do
this any time soon.

Unemployment is at a low level, the economy seems to be rebounding, commodity prices are increasing and a hint that inflation is on the horizon could suggest further big decreases in interest rates are unlikely and could be close to the bottom of the cycle.

Its our view interest rates wont go up for the foreseeable and worst case if they were to increase it wouldn’t be going up much because these interest rates are what is propping up our economy and the world economies at the moment which is why housing is booming in lots of other countries as people spend the cheap money which is exactly what the Governments want them to be doing.

There is an argument that if you wanted stability with rates potentially at the lower end of the cycle you could lock some lending in for 2-3 years just in case but the 1 year fixed rate continues to be the best performing strategy in terms of the lowest interest cost.

Want to learn more about these changes?

Let us know a bit about you and how we can help you – and we’ll be in touch as soon as we can!