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Out of the mouths of babes

Monday 18th December 2000

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Spend, don't save, says Martin Hawes

By Nikki Mandow

New Zealand's best-known personal finance writer has three children aged between 15 and 20 who all, he says, still speak to him. Which is somewhat surprising given that Martin Hawes' investment philosophy, as articulated in his new book Successful Super (Penguin, $29.95), revolves around parents spending the kids' inheritance to achieve a more comfortable retirement.

Hawes' argument is simple. Give the kids a great start: pay for their education when they are in their twenties; cough up for a trip overseas if necessary; best of all, trade off a bit of earnings to spend more time with them when they are growing up. Then let them get on with it. If you've done the job right, by the time they're 50 and you suck the kumara, they shouldn't need your dollars.

"Very deep down I would like to leave my kids something, and because I've been an efficient saver and am comfortably off I probably won't spend it all and my children will end up getting something. But if it was a trade-off between living the lifestyle I want and leaving my children something, I'd go for the lifestyle."

Many New Zealanders have had the savings ethic deeply ingrained in their psyche, Hawes says, and some older people live a less-than-opulent lifestyle while sitting on considerable assets. In most cases, that's ridiculous. As people live longer, and look to an enjoyable, active "retirement" (although in 10 to 20 years most people won't "retire" in the normal sense of the word, they will just work less, and take more breaks, he says), they need to be clever in building up their assets and investments, and equally clever in working out how and when to spend them. In an ideal world, Hawes says, you'd hand over your last dollar on your last day, and the cheque to the undertaker would bounce.

Until the time comes when we are allocated a day to die, that's never going to be easy, but Hawes has a few suggestions for sensible financial planning and then making the most of your assets.

Buy your house. Unless you live in a no-hoper small town where house prices have no chance of improving (in which case rent, don't buy), your house is likely to be a sound investment.

Pay off debt, particularly your mortgage, as quickly as possible. "That will be the best investment you can ever make in the vast majority of circumstances," Hawes says. It's a case of comparative returns. A good, reasonably safe investment might return 9% per annum - that's 6% after 33% tax. Your mortgage is likely to be considerably higher, probably nearer 9%. Don't believe the superannuation salesman promoting his product ahead of debt reduction, with the argument that a superannuation scheme will give you income.

Don't keep money in the bank. "One of the worst bits of financial practice is to have money in the bank while you've got a mortgage," Hawes says. (Basically you are lending the bank your money, then they are taking a cut and lending it back to you. Plus you have to pay tax on the interest.) You might need an emergency fund, but structure that into your mortgage through what's called a "revolving credit facility". This basically means that when you have excess cash, it's used to pay off your mortgage (and therefore saves you the interest payments for those days when the mortgage is less). But if you need the money, it's available (and your mortgage goes up again).

Develop a solid investment plan with a diversified portfolio, once you've paid off the mortgage. Look at foreign stocks as well as New Zealand ones - Hawes has about 50% of his investment portfolio in overseas equities, 10% to 15% in property, 10% in bonds and the rest in New Zealand equities. He has exposure to offshore equities through New Zealand-listed funds, although he is also keeping an eye on some individual stocks through various overseas websites (see box). Hawes reckons shares will continue to be a good investment for at least another 10 years, as the baby boomer generation around the world pumps excess cash into stocks. However, once these people stop working full time and start selling down their portfolios to access their capital, things might change.

Be wary of anything too flashy. "People often worry that their diversified investment portfolio doesn't give a very high return and start looking for something more exciting," Hawes says. "In my experience, 'exciting' investments are those which give good returns - I have never found losing money on investments very exciting."

Don't put everything into property. Your portfolio might include property, but Hawes believes the era of making big bucks from property investment is largely over. "Property is normally only a store of wealth these days, unless you can change the use of it (cross-leasing, for example, or turning a villa into a four-bedroom apartment). One exception to the "property might not be for you" rule is for women at home with children, he says. With women often giving up work for some period during their life, Hawes says they are often disadvantaged in the superannuation stakes. Owning and actively managing a rental property, even within marriage, can be a good investment.

Make your investments a priority. "People are always asking me for a share tip," Hawes says. "I believe the three best investments are education, education and education. Not only for the children, but for us, too. Investment deserves a lot of priority in learning. Go to seminars, read books, look on the internet, chat to people. You can't expect something as good as an investment return to drop into your lap." Anyone who's got rid of their mortgage and is starting to develop an investment portfolio should spend one hour a day building up their investment skills. "If it's a direct trade-off between one hour's earnings from work and developing your investments, you may find you get a better return from putting time into your investments."

Develop a network of people to talk to and learn from. Find a good financial planner, a share broker and a real estate agent (if you are considering property). But there are also networks that don't cost much. Join a trade association; go to company annual general meetings and talk to other investors; go to share broker, Stock Exchange and Real Estate Institute seminars; read magazines; join a share club; or look at the chat forums on the internet.

Get asset protection only when you need it. Ask yourself: "If I get sick, or injured, or die, does it matter? If the answer is "yes", buy insurance. If it's "no", don't. Normally that means that while the kids are around and you have a mortgage, you probably need life insurance and income protection insurance. Once both are off your hands, you don't.

Know when to stop saving and start spending, and use your assets. And that includes your house. There are two ways of using capital tied up in your house: trade down to a smaller one, or get a reverse annuity mortgage. These are common in the UK but still rare in New Zealand. The idea is to take out a loan with your house as security and have the money from the loan issued month by month as a sort of pension. Only one New Zealand company, Invincible Life, offers this service, but Hawes reckons families could easily organise it among themselves. In this case, the children offer a loan to their elderly home-owning parents, again with the home as security. The loan is issued piecemeal on a weekly or monthly basis. In its common form, a reverse annuity mortgage guarantees the homeowner (who continues to live in their house) an income for life, regardless of what equity is left in the house, with the property reverting to the insurance company when he or she dies.

To Hawes, it's this sort of asset management that will allow people to live without money hassles. "I believe living on your capital is attitudinal. Saving is a hard habit to break, but there are lots of ways of accessing your capital once you've decided that you are prepared to spend it."

Contact Hawes on mhawes@gallarus.co.nz

Nikki Mandow

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