The NZ news media is on a run with terrible personal finance articles.
Now, we’re being told about the “frightening” long-term consequences of people “stripp[ing]” their “KiwiSaver accounts to fund first home purchases”.
The article in question uses some emotive (and unnecessary) language:
- Money being “stripped from KiwiSaver accounts” – how about money being “withdrawn” from KiwiSaver accounts”?
- Young Kiwis are being left “with little choice but to raid their KiwiSaver schemes to help them buy their first home” – how about “Young Kiwis appear to increasingly be using the funds in their KiwiSaver accounts to help them buy their first home”?
- We’re warned that “the long-term consequences are frightening” – how about saying “the long-term consequences need to be considered and/or kept in mind”?
(The article later quotes a representative of AMP. But let’s take the comments of a KiwiSaver provider with a grain of salt. They have an incentive for more money to be kept in KiwiSaver, because they can charge fees on those funds. The more money that stays in KiwiSaver, the better for them. I really hope the article misrepresents the views of Aaron Gilbert from AUT’s finance department, because at least he is less conflicted than a KiwiSaver provider.)
Anyway. Enough of my little rant.
I’m pleased that Sorted has come to the party. It published an article last year titled “Is tapping KiwiSaver for a first home even a good idea?“. I stumbled upon this because Sorted is promoting it on Facebook and possibly elsewhere. (Great stuff, Sorted!)
Sorted’s article is a more balanced view in relation to using KiwiSaver funds to buy a first home. In particular, it explains why using KiwiSaver funds to buy a home can make sense. The key reason being that if you can own a home outright by the time you retire, you’re in a much better position than you’d be in if you didn’t own a home. NZ Super is pretty generous in the scheme of things, but if you have to pay rent, it might put you in a tenuous situation.
This hits at a point that I want to stress.
This “dilemma” – whether to use KiwiSaver funds to buy a home, or whether to keep them in KiwiSaver – is a false dilemma.
Let’s take a step back to show what I mean. Let’s ask a broader question.
What financial position do you want to be in when you retire?
(Let’s set aside definitions of retirement, and what it means to you. That’s the subject of another article.)
The answer to this question relates in part to the savings you’ve accumulated when you retire. This includes your KiwiSaver funds, as well as any other investments you’ve accumulated outside of KiwiSaver.
But it misses an essential piece of the equation. You can have two otherwise identical people who are retiring with $500,000 in savings. But their situation is profoundly different. Because one of those people has a mortgage-free home, and the other doesn’t.
Buying a home, and paying off the mortgage, is a big factor relating to retirement planning.
Talking about using your money to buy a home as if it doesn’t relate to your retirement outcomes, misses the point entirely.
And in fact, I think the minimum situation Kiwis should shoot for is to have – or be able to afford – a mortgage-free home (or an occupancy advance for a retirement village unit) by the time they retire and are entitled to NZ Super. (Assuming NZ Super as we know it will be available.)
Whether you want or need a home before this, is up to you. Owning a home is nice, but there’s nothing fundamentally wrong with renting. As long as you have the money to deal with your housing situation by the time you stop working.
The good news with this “minimum” requirement is that the sort of house that most people need in their retirement is a lot more modest and inexpensive compared to the sort of house that many people need when they have young children. And if you have KiwiSaver, you can use your KiwiSaver balance, once you can access it, to contribute towards the purchase.
A more important question
This talk about KiwiSaver is a red herring.
There’s a more important question than whether to spend your KiwiSaver funds to help you buy a home. This will have a bigger impact on your long-term financial outcomes than whether you use KiwiSaver.
The question is: Are you spending too much on your home?
It’s easy to think of budgeting in terms of how much you spend on lattes and avocado toast. But in the scheme of things, it’s the big costs that will get you. Like spending too much on houses on cars.
If you spend less on your home, and can pay your mortgage off 5 or 10 years earlier, that will have a huge impact on your long-term financial outcomes. If you can put some or all of what you were previously putting into the mortgage into savings, you’ll end up in a much better position when you retire.
If you buy a home that’s so expensive that you can’t build your investments, then that may compromise your long-term financial outcomes. Although being able to own a mortgage-free home or get into a retirement village is a minimum goal by the time you retire, I recommend building a decent nest egg over and above owning your own home, because it’s the income from this nest egg that will support your lifestyle.
I’ll be honest: my wife and I spent more on our house than we needed to. But we did this with our eyes open, knowing the long-term financial outcomes, while still being confident about where we wanted to be when we retired. It’s all about your personal priorities and making these decisions mindfully, aware of the consequences.
If you have a mortgage, at the very least consider contributing to KiwiSaver. Or focus on repaying the mortgage as quickly as you possibly can, so you’ve got plenty of time to focus on building income-generating investments before you retire.
As to the question posed by the title of this article – Should I use my KiwiSaver funds to buy a house?
The answer is, it doesn’t really matter. It’s all part of the same picture.
If you can buy without using your KiwiSaver funds, that’s great, and more power to you.
But if you need to use your KiwiSaver funds because you’re spending more on your home than you should? Well, that’s an indicator of a different issue altogether.
(And if you want an independent person to discuss these big decisions with, I know a good financial adviser. Unlike most people you deal with when buying a home, he doesn’t have an incentive to push you into a home or recommend that you spend and/or borrow more than you need. He considers your broader circumstances, needs, objectives, values, and priorities before making any recommendations to you. Check him out at www.fairhavenwealth.co.nz).
- Fixed costs aren’t necessarily fixed. (Or: Less car, less health, more wealth)
- When you spend money or use your time, you make trade offs . Hopefully the trade offs you make reflect your priorities
- The big financial decisions you make need to reflect you values and priorities
- Budgeting – some contrarian thoughts
- On home ownership
- KiwiSaver – if you’re young, get engaged! You’ll be glad you did
- Retirement planning and whole-of-life planning