The Retirement Commissioner Diane Maxwell says getting on the property ladder is “the single best thing you can do for your retirement”.
She “fully supports” young people taking money out of their KiwiSaver for their first home, as paying down a mortgage encourages them to put money toward a valuable asset, rather than blowing it on things they don’t need.
Talking to interest.co.nz’s Jenée Tibshraeny about the difficulties young people face saving for retirement when they’re struggling to pay their student loans and save for a first home, she says:
“For young people at the moment in that low interest rate environment; if they can cobble together a deposit, if they can get themselves onto that ladder, if they can pull out their KiwiSaver money to put in, they can start down that path.”
Maxwell recognises this isn’t a “comfortable” journey, with house prices, particularly in Auckland, miles above household incomes.
“The thing about paying a mortgage down is it’s a painful discipline, but it sucks the money out of your pay packet, and it sticks it into an asset in quite a brutal way. And that’s a good thing.
“If it’s not sucking that money out… then what we’re seeing is where it goes is an extra bottle of wine, an extra pair of shoes…”
“Reaching retirement mortgage free is probably the best thing you can do.”
Maxwell says diversification is still key when planning for retirement.
“You don’t want to put all your eggs in one basket. Nobody should ever say ‘investing in property is my only way to go’.”
She warns people shouldn’t be prompted by our low interest rate environment, which is great for borrowers and bad for savers, to start chasing risky investments, even if it means getting on the property ladder.
Leaving high school: Do young people know what they’re in for when they start study or full-time work?
Taking things back a step, Maxwell notes you can do a lot of damage to your finances between the ages of 16 and 24.
Whether it’s borrowing for a car, moving out of home or forking out for university, she says people can easily reach their early 20s with a lot of debt stacked up.
“If you add the $14 billion in student debt on top of that, people can enter their working lives with a lot of debt behind them.”
She says schools, tertiary providers and corporates are doing increasing amounts to educate school leavers about their career options.
They’re working particularly well with young Maori and Pacific students, with banks even running open days to encourage this demographic to consider entering their industry.
Yet Maxwell is worried we’re still stuck in the dark ages, and young women are being discouraged by their families from entering previously male-dominated, high-earning careers.
She’s noticed a number still wanting to enter “care professions” like hairdressing and air-hostessing.
“There’s nothing wrong with any of those professions, but it means we still have women reaching retirement with so much less because they’re earning so much less along the way.
“I’m trying to encourage young girls to say, ‘what do I want out of life?’ ‘What am I going to earn?’ ‘What kind of lifestyle is that going to bring me?’”
Leaving home: How is NZ being affected by young people delaying becoming finically independent from their parents?
Maxwell is concerned that like many Europeans, Americans, Brits and Aussies, New Zealanders in their 20s can’t afford to leave home, so they’re only having children later in life.
“What we don’t need is a reduction in people having babies, because it’s going to exacerbate the aging population.
“Our birth rate is too low already. In New Zealand it’s 1.9. The replacement rate for a population is 2.1.
“The fact that people are going to be sitting around with mum and dad until their late 20s and not going out and getting into relationships, or getting married and setting up a home, is actually going to bite us further down the track.”
While millennials can expect to have a bed at their parents’ homes until they’re 30, Maxwell says they shouldn’t expect a big inheritance when their parents pass.
“If parents are retired for 30 years, they may actually burn through some of the equity in their property, they may burn through their savings in a rest home, and actually what you’re inheriting may be a lot less.”
Getting cash fast: Do financial institutions need to take more responsibility lending to indebted young people?
Maxwell doesn’t stay up at night worrying about young people with credit card debt, but is very concerned about those with high interest, second, third and fourth tier loans.
“Banks have quite stringent credit risk criteria. If they think you’re not going to pay it back, they’re far less likely to lend it.”
She doesn’t doubt that credit card debt is problematic as you incur high interest (17-22%). Yet the issue becomes really serious when you’re paying up to 50% interest to buy stuff that doesn’t last long, like a car or a stereo.
The longevity of KiwiSaver: Will KiwiSaver deliver in 30 or 40 years’ time when millennials retire?
Maxwell admits that “anything you do is a risk”, but says going into KiwiSaver is a risk worth taking.
It’s a joint effort between you, your employer and the government and you can take you money out for a house or hardship.
Maxwell says the removal of the $1000 KiwiSaver kick-starter shouldn’t deter people from entering the scheme.
She’s disappointed it went, but says that at $2.5 billion, it was costing the government a lot.
She would like to see it offered to certain groups of society, like school leavers starting their first jobs.
“KiwiSaver is a phenomenal thing and I think it’s what’s going to save us in the long term.”
Maxwell concludes: “Spread whatever it is you’ve got; KiwiSaver is a great thing; try to get into the property market too; try to have some savings on the side; the best thing you can do is spread that risk.”