bank calculator mortgage rate
Shared by: rickman2
Kiwi Saver and this calculator. Please read these notes before you play with this spreadsheet calculator. The purpose of this note is to give you some guidance as to how to answer each question and also to identify some of the risks inherent in this offering that are not covered in the spreadsheet calculator. 1. Your age. This is important as the older you are the closer you are to payout day. The closer you are to payout day the better the return is on the money you put into the fund (as distinct from the governments money). If you are over age 65 you do not get to participate, so if you are likely to turn 65 before 1 April next year you should get in now even though you will only get one lot of $1040 rather than 2 which is the case from 1 April 2008. This spreadsheet assumes a 1 April check in date to Kiwi saver. If you are over age 60 you have to stay in for 5 years minimum, so answer this question as age 60 for all ages between 60 and 65. 2. Current Income. This is your anticipated income from salaries for the year that you enter kiwi saver indicatively March 2009. This is important as once you are in, for the first year you will be paying at least 4% of this into your kiwi saver account. This number drives your contributions into the calculation. 3. Income Growth. This number should be the rate at which you expect your income to grow over your remaining working life. This should be real growth and not inflationary growth. Inflation numbers can be obtained form the Reserve Bank Website if you want to see what happens with Nominal dollars over time rather than today’s dollars. If you do anticipate inflation then the numbers get very big, and the number you collect at age 65 is nominal dollars rather than a number anchored in today’s buying power. For most income growth will be relatively small. Especially for those over age 40. By mid life you have most of the incremental experience that an employer will value, and unless you are retraining and adding saleable skills your income is unlikely to rise in real terms. For those blessed with youth, this is less true as experience acquired adds to value. Even a 2% compounding real growth in income produces exceptional incomes in today’s dollars in 40 years time. If you have any doubts have a look at page two on this calculator, but don’t play with this area or you will stuff your calculations. 4. Employee/Employer Employees are in a slightly different position to employers. For employers the employers contribution will always be your own money, this is not necessarily the case for employees. The spreadsheet assumes that if you are an employer the only crown subsidy is the tax break on the employer’s contributions and this is calculated at the corporate tax rate as most self employed people who are organised should not be paying tax at a rate greater than the corporate rate in any event. The exception to this is self employed people covered by the attribution rules, as they are treated as employees by the IRD in any event. If you are subject to the attribution rules elect the employee category. 5. Bargaining Power. Many employees are under the misapprehension that the employer contribution is a gift. This is only true for those employees with exceptional skills, who are hard to replace. They have strong bargaining power. However I suspect that in reality most if not all employees have weak bargaining power and that in effect those employees who elect to go into kiwi saver will be paid less in cash salaries than those that don’t. Moreover in the 2008 salary rounds more employers will conduct reviews on the basis of total employment cost. This means they will say to employees “this is what you are going to cost me; you decide where you want it to go ….” In effect those who either don’t join Kiwi saver, or elect to take a contribution holiday will be offered higher base pay. What this means is that in effect the employers contribution less tax and the employer subsidy is in essence the employees money. The spreadsheet therefore assumes that the employer’s contribution is your money, net of tax and the employer’s tax credit. 6. Mortgage Diversion. If you elect mortgage diversion half of your contributions are diverted to a mortgage on your primary residence, including a revolving credit facility. This is exceedingly advantageous and significantly increases your return. If you answer yes to this it will do so for the entire time you are contributing to Kiwi saver. In effect the calculator assumes that you will organise yourself so that you have a qualifying mortgage for your entire life. If you elect mortgage diversion you can only divert half of your contributions, the crown subsidy and the employer contributions roll on regardless. 7. First Home Buyer. If you say yes to this the spreadsheet assumes that you can’t possibly be eligible for mortgage diversion. I guess this is obvious as you don’t own a home that you live in. It also assumes that you will contribute for 5 years even though you are only obliged to contribute for three. The reason for this is that the Housing Corp payout is maximised after 5 years. Mortgage diversion cuts in one year after you have cashed out to buy a house. Before you answer yes to this question you should check whether you will be eligible. If you earn more than $140k pa at the time you elect to take it out you will not be eligible. There are price caps on what you can spend your money on. The sort of properties that you can buy within these caps might not be properties that you are prepared to live in. You can pool with others, but you do all have to live in the property. 8. Contribution Holiday. This is a feature that enables you to opt out in time bites of between 3 months and 5 years. In theory you can do this forever. The spreadsheet only allows you to opt out once. So you answer yes if you plan to opt out for a time and then put in the age at which you plan to opt out and the number of years you plan to opt out for. If you put in an age to opt out that is younger than your age you will get a crap answer, equally if you opt out before you can get your first home handout the answer is nonsense. Logically you should stay in for at least 6 years, if you can get the first home buyer option, and then opt out for a maximum number of years that should not be longer than the number of years to go to age 65. The best returns for the young are generated by getting in now for six years and opting out though to age 60. 9. Contribution rate. This is a simple choice; you either elect 4% or 8%. There is no good reason to go above the minimum unless you are on a very low wage. But you do still have to pay your bills. 10. Earnings rate on fund. This is a hard one. If you elect a cash or bonds fund the rate you can expect is about 4% tax paid, it is highly unlikely to be more and might be less. If you elect a fund with some growth assets it might be more. For example equities and property over the long haul will produce between 6 and 8% tax paid. If you are investing for less than 10 years, i.e. you are over age 55; there is at least a 30% chance that the actual return on growth assets will fall outside this range. If you are investing for more than 25 years it is very unlikely to. The costs of running this plan will be immense, the providers will take a clip the fund mangers that will invest the funds will take another clip and you would have to be very brave to predict a rate above 6%. If you were to pick a provider with 75% in growth assets 5% would be realistic, provided you have got 10 years at least in front of you and if less time you are prepared to face a return range going as low as zero. 11. Marginal tax rate. This is intended to be a guess at your marginal tax rate over your remaining life. To hard, just use your current marginal tax rate, less than $38k, 19.5%, less than $60k 33% above that 39% 12. Corporate tax rate. From April 2008 it is 30% 13. Mortgage rates. The best alternative savings plan for most people is paying off your mortgage, as this produces a tax free return equivalent to the interest you are paying on your mortgage. This is the opportunity loss you are suffering if you put your money into kiwi saver. If you are not a net borrower your opportunity cost is the next best available low risk return you could earn on your money net of tax. For most a good proxy for this is the 10 year bond rate. Currently this is just over 7%, which at a marginal rate of tax of 33% is the equivalent of 4.69% So if you are a borrower put in your mortgage rate, if you are not a borrower but in the net of tax bond rate. If you have tax deductible debt, put in the mortgage rate less the tax break at your marginal tax rate. You are now ready to interpret the report. Your cash contribution. This is the sum of all your 4 or 8% contributions, plus your employers contributions net of the tax saving on those contributions less the employers tax credit which it is assumed the employer will pass on to the employee. If you are a first home buyer the cash you get back at year 5 is deducted, so this is the hard dollars you have invested in kiwi saver over your life time. Cash Back. This is the amount that it is anticipated you should be in a position to pullout. If you have assumed modest and real income growth over your life it is a number that can be judged against today’s buying power. Net Present value. This number will be small even though the cash back number is large. If it is positive this indicates that Kiwi saver is producing a better return than you next best available opportunity be it mortgage prepayment of alternative investing. It suggests that you should then participate in Kiwi saver. If it is negative then your alternative investment or mortgage payment the best option. Internal rate of return. This is in essence the interest rate you are earning on a compounding basis over the time your money is beyond your control and in the hands of the Kiwi saver provider. Risks not accounted for. Mortgage diversions and holidays might be abolished, as might the crown subsidies, this dramatically affects the outcome. Each election is an opportunity for political interference. Twice in the last 35 years retirement issues have been substantially changed. This is a big risk. Using this tool if you are already in Kiwi saver. If you are already in kiwi saver, you can still use this toll for checking what the return for you is on your future contributions. You simple put in your current age and circumstances and rerun the report. You ignore your past contributions as they are now beyond your reach. This is the investment concept of sunk cost.