Question:

I am a 65-year-old immigrant, my wife is 59. Ten years ago we bought a property. On a realistic basis its value should be $360,000 to $380,000. My mortgage is $105,000.

I am still working. My salary is $60,000, and I also receive NZ Super. I joined KiwiSaver 18 months ago. I pay 4 per cent and my employer pays 2 per cent. I can work another four to five years but nothing is sure in these days. My employer may encounter difficulties.

We had property back in my native country, sold it and the money was transferred here. Right now it is sitting in the bank. It is about $125,000.

We would like to do something with this money like:

Change the area where we are living and move to a better neighbourhood, or Establish a small business, or Pay part or my whole mortgage, or Buy some shares to have some passive income for my older age, or Leave it in the bank for the moment and wait for a time when the market has settled.

Answer:

Mary Holm: Even if the markets weren't so iffy, my advice would be the same: stay in your current neighbourhood and get rid of your mortgage.

Generally speaking, it doesn't make sense to have considerable savings in a bank account if you have a mortgage. By all means leave a few thousand there for emergencies, but nowhere near $125,000.

Let's say your mortgage interest rate is 7 per cent. When you pay off that mortgage, you improve your wealth as much as having an investment that earns 7 per cent, after tax. And a bank account will pay you only around 3 or 4 per cent after tax.

Another way of looking at it: you are paying 7 per cent on the mortgage and bringing in only 4 per cent on your savings. The situation is unnecessarily costing you 3 per cent a year.

What if you face an emergency? You should be able to take out another mortgage. Alternatively, you can probably pay off your mortgage but keep the facility open so you can borrow again if you have to.

The benefits of repaying your mortgage are even stronger at your stage in life. As you say, you never know how much longer you will be able to work - because of your employer's situation or perhaps your health. And it's not a good idea to go into retirement with a mortgage.

I'm assuming you are not on a fixed-rate mortgage with a penalty if you repay it early. If I'm wrong about that, depending on the size of the penalty, it might be better to wait until your fixed period ends and then repay the loan.

What about the other $20,000? I would leave it in a bank account, with perhaps $5000 as your emergency fund and the rest as the start of a savings fund. If you continue to work for a few more years, you should be able to build up the fund considerably, given that you'll have no mortgage payments. And in three years or so - five years after you joined KiwiSaver - you can add your KiwiSaver money.

At that point, you could use the money in the fund to move to a different neighbourhood - as long as you do it with no mortgage. But I suspect you might prefer to supplement your NZ Super, so you can buy a few fun things.

If you have a sizeable amount by then, consider putting some of it into a share fund, to be spent more than 10 years later. But that's too risky with money you expect to spend over a shorter period. Better to put that in high-quality bonds and bank accounts.

You also mentioned starting a small business. That can be a great way to bring in some retirement income. But don't take on anything that involves much start-up money. Too many small businesses fail, and you haven't got decades of income ahead of you to recover from that.

One more thing: at your pay level, you might want to cut back your KiwiSaver contributions to 2 per cent when that is permitted, from April 1 onwards.

Even at 2 per cent, you will be putting in more than the maximum tax credit of $1043 a year. So you don't gain anything by putting the extra 2 per cent in KiwiSaver, and you lose flexibility because it's tied up until five years after you joined.

If you happen to like the way your KiwiSaver money is invested - and I would hope you do - you should be able to invest in a similar fund, either offered by the same company or another fund manager.

However, in your circumstances the tying up of the money might not matter - in which case, let sleeping KiwiSaver funds lie.

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.