Final Thoughts on my Mid-2023 Goal #2 Updates

In my recent posts, I looked more closely at my mid-2023 goal #2: focus on long-term goals, like retirement and investments. 

As a part of that, I reviewed the state of my long term funds, identified several decisions I need to make before I can move forward, and listed the topics and questions I need to research in order to make those decisions. As I do not have enough time to do the proper research right now due to my PhD time commitments, I have instead established goal funds ($4K Dividend Fund, $1.6K House Down Payment Fund) so that at least the money I have leftover every month has a specific home and purpose. I've found that assigning homes for my money motivates me to save more.  

I found this process really thought-provoking, as detailed below.

Saving is a Mind Game: Actionable steps and Doable mini-goals that feel like progress will help me win that game.

The psychology of money is so interesting! It's amazing how it feels so incredibly overwhelming to think about saving up for huge goals like $1M, e.g. to receive enough in dividends to live off of. Even $160K for a house down payment is too much for my brain. Those amounts just turn me off immediately, even though I am a keen saver and have previously saved $50K for my house down payment in one (slow) chunk. A part of me just wants to quit when I see those numbers... Why even bother? It's going to be so difficult to meet that goal; I'd just rather not even try since I think I'm going to fail.

I think this is why I've sort of held off on seriously saving for my long-term goals for the past few years - well, that and the fact that my income is so low. I am making ends meet, there hasn't been a ton leftover for saving like there has been in the past.

But, that said, saving $4K, $5K, even $10K? I've proven to myself that I can do that somewhat painlessly, even on a low income. And I've seen how it grows over time - saving begets saving. The magic of compounding, of course. 

All that's truly left of my goals are long-term, and my long-term goals are BIG. Retirement: $1M+, house down payment: $160K, dividend income: $800K, etc. So I recognized the need for a strategy for my money mindset around these BIG savings goals. I really think this $10/mo or 1% method may be the ticket for me going forward. $10 per month in dividend income and 1% progress is, by all accounts, very very very small, but still feels very concrete to me; it feels like progress. Most importantly, it feels doable. And that is probably the most important bit of all, as it keeps me from just giving up and putting saving large amounts in the too-hard basket. With this mindset, I can keep moving forward, inch by inch.

Well, who knew? It turns out that all of the advice around productivity I have been reading to help me with my ADHD and PhD is also applicable to financial goals: if you break the savings goals down into small chunks, before you know it you've reached all of your short- and medium-term goals and can now concentrate on your huge long-term goals, again in small chunks. Incredible. 😀

The Reality of Home Ownership For Me

Another somewhat surprising thought dawned on me as I was doing this planning. To be frank, I am now sure that I do not have the desire to own a house. Definitely not in NZ, but not even in the US! I've been saving/thinking about saving for a house down payment for so long that I actually forgot that I never had really wanted to own a house prior to moving to NZ. Once I moved here and realized I could never have a dog without owning a house, that became the goal. (Most landlords will NOT rent to someone with a dog/pets, and it is unfair to a pup to not have a stable situation where I can provide a long-term commitment to keeping the dog. Especially "big dogs" like Labrador retrievers, which is the type of pup I would like to get.)

Ramit Sethi's breakdown of the actual costs and responsibilities vs the rewards has opened my eyes a bit more lately. The maintenance, the worry, the interest rates, the huge weight of debt, the very low quality for very high prices in NZ, the weird 1 year mortgages they have in NZ. It all just turns me off, to be completely honest with you.

In NZ, I just plain will never qualify for a mortgage by myself. My income is so low that the calculators don't even work for me! And I don't ever plan on working full-time in NZ, so my income is likely to never be high enough as a single person. I'd have to have the full amount of the house in hand and pay cash for the entire thing. Or, go in on a property with a friend. Or, find a partner with stable, high income (the hard part there would actually be just finding a partner!). Or, inherit a huge amount of money.

However, I know owning a home is likely to be the only way to be able to have a dog in NZ, so still I persist.

Despite all of my misgivings about home ownership and the impossible nature of it, esp in NZ, I fully expect my House Down Payment Fund saving to take place in drips and drabs over the next 15-20 years of my life, just in case. I sadly don't think that pipe dream will ever come to fruition, at least, not if I live in NZ. But one has to have hopes and dreams, and the possibility of getting a pup is what drives me forward with my savings for this goal.

A New Stage of Life and Mindset Shift

With the completion of my $5K Hobbies Fund and just plain running out of ideas for short- and medium-term savings goals, I really feel like I've shifted into a new phase of my financial life. I'm now thinking very seriously about retirement and what I want the rest of my life to involve, starting now (well, technically, after my PhD is completed): travel, fun, family, friends, lots of free time and time off, hobbies, exploring and adventures, increased health and healthy activities and maintenance, and deep, quality, rewarding work at a high pay rate. Retirement and retired life is somewhat close enough that it feels tangible. With my PhD coming to an end, I expect my career to also shift into a new gear. So: I'm experiencing a lot of great, new beginnings in my mid-life, I guess as it should be? In any case, it's a good feeling.

 

Mid-2023 Goal #2 : Focus on Long Term Funds - Homes for My Leftover Money

I left off my last post with this question: What do I do with my money until I have time to research??? 

While I focus on my PhD, I need to decide what to do with the overages from each month. 

Firstly, I'll transfer the money to my online NZ savings account and keep track of how much I end up saving. What to save for, you ask? Where is this money's interim home while I wait to research all my ideas, decisions, topics to research, and things to consider to do with it?

Ideas:

• Additional Kiwisaver contributions? 
• Convert it to USD and add it to my US brokerage account balance? 
• Add to my house down payment? 
• Build up a fund for dividend investing? 

All great options! However, I'm not in a position to make a final call yet. However again, I save best when I have a concrete goal to save for. I can always re-assign the fund purpose later, so to trick my brain I just need to pick the fund goal that excites me the most - probably a fund for dividend investing or a house down payment? How about splitting the difference and doing both? 

Mid-2023 Goal #2.1: Establish a Dividend Fund

So, for the dividend fund, it's pretty far fetched to think I can invest enough in dividend stocks and funds in order to earn enough to live off of. When I do the math, at a 3% yield (dividend funds usually yield between 1 - 6%), I'd need $1.2M in stocks, or between $800K and $1M (depending on the calculator), to earn my retirement income goal of $3K/mo. Even the lowest number, $800K, is a lot! It's too overwhelming to even think about.

Therefore, I think I'll just concentrate on $1 at a time. 

To earn $1/mo in dividends, I'll need $400 in dividend stocks or funds at a 3% yield. What?! That's easy! I can do that. For $10/mo, I'd need $4K. A bit more of a stretch, but it still feels do-able. So that will be my first goal: invest enough in dividend stocks or funds to earn $10/mo in retirement, or ~$4K. I'll tackle this problem inch by inch, as I have my whole life.

I don't have to decide what those dividend funds or investments are quite yet. Without research, I don't honestly know what would be best. But what I can do is save up to invest this money in dividends later. 

Ladies and gentlemen and everyone else, my new retirement goal #1!: 

$4K for Dividend Investing to receive ~$10/mo in retirement.

Mid-2023 Goal #2.2: House Down Payment Fund

For the additional house down payment fund, I again know that the end goal number has to be BIG. Looking around on TradeMe, my ideal house/apartment doesn't exist. However, the ones that meet the extremely bare minimum standards are > $650K. (I'd be pretty chill with a studio with a bath tub and green space, or a 2 bedroom 2 bath with the same amenities if sharing with a flatmate, but places with those stats are far and few between. Much more common are 3 bed, 1 bath places, so I searched for those.) 

To be conservative, let's say I need a house deposit that aligns with an $800K purchase price, because, let's face it, there are all sorts of extra fees and hidden costs of home ownership. While I may aim for  a max $650K price tag, no doubt I'll need some reserve cash for fees, LIM reports, lawyers, furniture, maintenance, etc. 

For an $800K house/apartment, a house down payment of 20% is $160K. 

I have $50K, so that leaves ~$110K more that I need to save. Again, that's, uhhhh, a lot. Some simple math shows that every $1,600 I save brings me 1% closer to my goal. So, to break this down into manageable chunks, so let's do $1.6K to start. Easy! 

Presenting, for the first time, my second 2023 retirement goal #2!:

$1.6K House Down Payment Fund, continued

Allocating the Overage to the Funds

I think I'll split my monthly overages in half - half to one retirement goal, half to the other.

 

Next post: Final Thoughts on the above

Mid-2023 Goal #2 - Focus on Long Term Funds - Research List

OK, so I've just described how I've saved up for all of the short- and medium-term goals I can think of, and how it's time to move on to focusing on my long-term goals.

This is the fun part - I get to decide what to do with the money I don't spend each month, from now til December!

My main financial focus for the rest of 2023 (and beyond) *should be* diving deep into retirement and investment strategies. Exploring new vehicles, reviewing how to balance my portfolios, making sure I'm diversified, and, of course, transferring the leftover money to savings and investments as needed.

The Research List

Unfortunately, most of my time from now til Dec will be spent on my PhD. Therefore, a lot of the time I need to spend doing research just isn't feasible right now. When I do have time, I would like to:

• Figure out how to maximize earnings on my cash (liquid) savings. Tasks:
  
  
• Research how much NZD is insured by the NZ gov't.
  
  Answer: up to $100K per bank, starting in late 2024. I'm very very close to this limit at Rabobank and need to look for an alternative for additional savings, unless I use that $$ to invest a lot of my cash in stocks, start funneling my savings into Kiwisaver, or convert a bunch of cash to USD and put it in a bank there.
  
  
• Research other online savings banks in NZ to maximize earnings on savings while interest rates are high. Looking for:
  
  
• high interest savings accounts
• no fees
• options for different savings schemes like Rabobank's
• good credit rating
• good customer service and customer reviews
• easy but secure transfers
  
  
• If I stick with cash, SBS, whom I just applied for a credit card with, seems like a good NZ option.
  
  
• Figure out where and how my cash savings should be invested/saved. I've already reviewed my different cash (liquid) funds and when I think I will be spending each batch of $$. This post covers this - and I've updated it to reflect my newly completed fund. Anything to be spent in the next 3-5 years should go in a high interest rate savings or CD.
  
  
• My short-term fund cash - $5800 or ~2.5% of my net worth - will stay in a high yield savings account
  
  
• My medium-term fund cash ($43K or 18% of my NW) will go in CDs once I make some decisions (see below). ~$12K of that is already invested in Lending Crowd.
  
  
• Schedule a transfer of the entire amount out of my 60 day Notice Saver on 2 Oct. DONE.
  
  
• My long-term fund cash ($50K or 21% of my NW) needs to be invested in the stock market, but I'm not sure how to go about this. In the meantime, if I can plop it in high yield CDs for 6 mo - 1 year while I research what to do with it and while interest rates are high, that would be ideal.
  
  
• Therefore, $81K of my cash in my NZ savings account needs to go into CDs for 1+ years. A few decisions still to be made:
  
  
• Decide if I want to create a CD ladder or one big lump sum term deposit for my medium- and long-term funds to take advantage of the higher interest rates.
  
  
• Figure out how to structure the CD ladder - how much in each one, how long, should some terms be 5 years?, etc.
  
  
• Research if I should keep the house down payment $$ in NZD or convert it to USD? I definitely do not want to invest it in my Kiwisaver due to potential US tax issues. I can buy individual stocks in NZ, invest in peer to peer microloans, and convert it to USD in invest it in non-dividend funds in the US, but that is about it.
  
  
• I will continue to put away 3% to my Kiwisaver to get the employer match, but I cannot rely on it for retirement because of US tax laws. I do not want to invest more than I have to to get the employer match as a result.
  
• I cannot invest in a Roth IRA or any US retirement accounts due to many reasons - I'd owe $1K+ in state taxes every year because I'd have to take the Foreign Tax Credit instead of my current Foreign Income Exclusion. 
   
• What frequency do I want the interim interest on the CDs to pay out? Answer: on maturity, to allow for maximum earnings.
  
  
• At what interest rate do I pull the trigger? We're already at interest rate highs for the past 15 years (6.5% per annum at a lower credit rate bank), so I think I need to go for it very soon. In my mind ~7% looms quite large, with 8+% preferable because of the taxes taken out. It's already at 6.15% per annum at my bank. I'll see what rates are on Oct 2 when my NoticeSaver funds come out of that account. This lists the dates that the NZ Reserve Bank reviews the official cash rates (interest rates).
  
  
• Confirm it is a bad idea to invest in NZ funds outside of a Kiwisaver due to US tax implications, complicated and expensive annual tax returns, and high fees/taxes. I think I'm likely much better off investing in low fee US index funds if I can figure out a way to convert my dollars at a good rate...
  
  
• confirmed. this is a terrible idea, with lots of tax implications. At least with the Kiwisaver, there are some arguments that it counts as a retirement account and therefore US tax laws may not treat it as a trust or PFIC. Some references:
• here
• and here
• and here!
• also here. 
• here also.
• and here - Kiwisavers are government 'insurance'
  
• and I swear there was a reddit post that mentioned their tax accountant writing a letter to the IRS about why they weren't filing certain tax forms as Kiwisaver was not a PFIC/trust...but I can't find it now! ETA: it is HERE.
  
• Direct link: With respect to Kiwisaver and US tax laws, there is reasonable doubt re: filing it as a trust: https://cloudtax.co.nz/articles/10/08/20/kiwisaver-and-us-tax
   
• However, I do not want to invest more than the employer match (3%) to the Kiwisaver, in case the laws do not change and/or don't fall in my favor.
  
  
• Individual stocks are not considered PFICs. This may be an option to invest in in NZ? But how are the gains calculated and dividends taxed in the US? I wouldn't receive a 1099 from NZ brokerages!
  
  
• Research how investing in individual US stocks works in NZ in terms of my US tax return.
• If I have to convert NZD to USD to buy these anyway - as is the case with the in the money put options - I'm better off just converting my NZD to USD using Wise and getting a better conversion rate, then investing via my Vanguard brokerage, up to the $50K FIF limit.
   
• Look into ways to invest in US domiciled funds from NZ? The currency conversion thing is a real killer for me!
  
  
• This is how one US-NZ person manages their tax obligations in both NZ and US: 

  "I weighed the US PFIC rules vs the NZ FIF rules, and chose to leave my investments in the US. I purposely realize gains from time to time to take advantage of the low US capital gains tax brackets (and get an uplift in basis) and claim a foreign tax credit for US income tax paid when filing NZ return.

  I get my NZ equity exposure through individual shares and the iShares NZ ETF ticker ENZL."

  also here 

• Decide if/when I should convert NZD to USD. And where should my money sit while I wait for a better conversion rate? Esp considering I think it is a bad idea to invest in stocks from NZ.
  
  
• Figure out if I should increase my Kiwisaver contributions or invest/save that money elsewhere? Where will it grow the most? Is locking away money more than the minimum required to get the employer match/government contributions in a Kiwisaver worth it, or can it grow better elsewhere? How much should I contribute if I increase my %?
  
  
• No - I'll invest up to the employer match (3%) and the annual government tax credits ($1,042.86) and that's it. 
• Restructure Kiwisaver investments to cut down the # of funds exposed to US tax confusion.
   
• Invest USD in funds in my Vanguard brokerage account up to the FIF limit - I can buy about $44K NZD (~$27K USD) more before I hit that tax limit. Note: foreign superannuation funds are tax free in NZ until withdrawal. Tasks:
  
  
• When does the FIF limit hit? Does it only count investments in non-retirement accounts? YES. "Any shares excluded from the FIF regime by these exemptions are also excluded from the calculation of the $50,000 threshold"
  
  
• This means that I can invest $50K NZD total. For my purposes, this is $50K NZD minus what I have invested in my non-retirement brokerage account. 
   
• What are the tax rates on funds after hitting the FIF limit? How are calculations done? Do some dry runs to see how it works. It may be non-advantageous to go past the FIF limit?
  
  
• Figure out how it impacts my NZ taxes if I exchange funds in my retirement accounts or non-retirement brokerage accounts. Does it matter when I aquired the funds? For my retirement accounts, I opened them up prior to moving to NZ. For the purposes of NZ tax laws, does that matter or does it matter when I last bought/sold/exchanged funds in those retirement accounts?? Are my Roth and Traditional IRAs a FIF superannuation interest according to NZ tax law? This will determine if they are subject to the FIF regime.
  
  Answer: This is still unclear, but as I cannot find any definitive answers online, I think it is safe to assume that the entire retirement account is exempt since I opened it prior to becoming an NZ resident. May be a good q for a tax accountant!
   
• Set up auto-buy $50 USD/mo in a Vanguard index stock and add this to my US brokerage account (DONE).
  
  
• Increase auto-buy amount if I can figure out a way to convert NZD to USD with a better rate than is offered at the moment.
  
  
• Research NZ tax laws re: foreign invested funds below the FIF limit. I think I only have to pay NZ taxes on the dividends if they are below $200?
  
  
• As a result of the above, should I move my investments in my US non-retirement brokerage account to non-dividend paying funds? And should I exchange my funds in my retirement accounts for dividend funds instead? Are dividends in foreign superannuation accounts (my IRAs) taxable even if the gains/balance are overall exempt? Do they count toward the $200 threshold? Answer: NO. "You need to return dividend income from your investment even if a FIF rules exemption applies." So it doesn't actually matter where my dividend funds are invested in the US, I still have to pay NZ taxes on them if they amount to > $200 NZD annually.
  
  
• More info: "The foreign superannuation scheme rules also apply to a low-value FIF superannuation interest. This is where the total cost of attributing interests in all FIFs is below the $50,000 threshold and the person does not elect to apply the FIF rules"
  
  
• Does paying US taxes on the dividends offset any NZ taxes incurred? It doesn't seem so, unless the FIF regime applies.
  
  
• I am actually better off NOT holding dividend investments in any of my Vanguard accounts, due to complex NZ tax laws around foreign investments, even < $50K threshold.
  
  
• I am also better off NOT taking the federal tax credit, even if it allows me to contribute to my Roth IRA, because I will then owe nearly $1K USD in state taxes, as the last state I lived in/vote in/have a driver's license for still considers me a tax resident of that state and there are zero foreign tax credits available.
  
  
• Learn how to rebalance my portfolios, both as a whole and individually within: Kiwisaver, Vanguard, Lending Crowd, and CDs/savings.
  
  
• review my asset allocations and how diversified I am.
  
  
• Learn more about portfolio management strategies and examine if dollar cost averaging and long term investing, etc are good ideas. Is time the great panacea we all think it is? Is buy and hold  actually as safe as we think it is? See here: the fallacy of time diversification. Are the basic PF tenets of buy and hold and dollar cost averaging misleading?
• another link
   
• Once I understand my asset allocation, risk level, and diversification better, decide if I should invest more $$ in Lending Crowd NZ. So far, pretty good returns but it is risky. How much risk can/should I tolerate?

• Investigate peer to peer lending in US. Any recommendations? Stories? Warnings?
  
  
• Are peer to peer lending investments trusts or PFICs to the US, or FIFs to NZ? How are they taxed in each country?
  
  
• Research Dividends - with the goal of earning $3K/mo by the time I retire. Some related tasks:
  
  
• ask my uncle, who has basically made researching and investing in dividends this his post-retirement hobby, for a tutorial
  
  
• explore if my uncle's methodology is applicable to me with respect to taxes as a US citizen living in NZ
  
  
• Find out if I can invest in individual stocks in my Vanguard brokerage account if I live in NZ? DONE - yes I can, but I will owe NZ taxes on the dividends! Is it worth it? See above. For US taxes, the Foreign income exclusion should cover me up to the standard deduction - e.g. $12,950 in 2022.
  
  
  
  
• figure out if dividend index stocks and ETFs may be a better route and investing in individual dividend stocks I'll constantly have to buy/sell according to my uncle's advice? Here are some suggested Vanguard dividend funds.
  
  
• Review my US tax obligations and if taking the Foreign Earned Income Exclusion or Foreign Tax Credit is better with respect to Roth IRA contributions and overall tax strategy. I may be able to contribute to a Roth from NZ?!? It hasn't been favorable for me to choose the FTC since earning my untaxed PhD stipend in NZ, but post-PhD, when I'm paying NZ taxes on ALL of my NZ income, it may be useful to switch to the tax credit from the income exclusion if I'm able to then contribute to a Roth IRA in the US with my earned income. It's confusing, though - I remember looking into this prior to my PhD and I wasn't able to contribute to my IRAs then?
  
  
• What would switching to taking the foreign income tax credit mean for my state taxes? My state apparently doesn't take into account any foreign tax credits. Upon first blush, without reading the fine print too much, it looks like my 2023 state tax bill would be ~$900 USD if I elected to take the Foreign Tax Credit? That doesn't feel like it is worth it to be able to invest in my Roth IRA...
  
  
• How are extra taxes paid each year carried over if I elect to apply the foreign tax credit?
  
  
• ANSWER: I am better off NOT taking the federal tax credit, even if it allows me to contribute to my Roth IRA, because I will then owe nearly $1K USD in state taxes every year, as the last state I lived in/vote in/have a driver's license for still considers me a tax resident of that state and there are zero foreign tax credits available to offset this ridiculous tax.
  
  
• Find a financial advisor who specializes in US-NZ tax law to ask my questions to!
  

Thoughts as I research:

It really feels like I'm thwarted at EVERY turn. The US doesn't want me investing in non-US funds, and NZ doesn't want me invested in non-NZ funds! How on earth am I supposed to save enough for retirement without investing in the stock market? 

I really thought I was onto something by possibly electing the Foreign Tax Credit instead of the Foreign Income Exclusion on my US taxes. That way, I'd have "earned income" that allowed me to contribute to my Roth IRA in the US. Buuuuut it turns out that I'd just be tacking myself with a $1K+ USD (>5% of my earned income) state tax burden in that scenario instead. I don't think it's worth it. Scratch that idea altogether! 

And for dividend investing in the US, I'd be screwed in NZ, as they'd just tax it as normal income. Even dividends earned in my US retirement accounts!

Investing outside of a Kiwisaver in NZ is off limits. It's a hard line I won't cross. It is unclear if even that is safe from US taxes, but I don't have a way to find out what to do about it. I've asked the tax agencies and they won't give a clear answer one way or the other. The cost of a professional doing a US tax return if not is prohibitive and would eat more than I could ever earn in returns. I'm just freaking stuck. 

My long-term investment savings needs to go to Kiwisaver first, I think. I suppose the goal for that money will be to use it to buy a house eventually?

For now, most of my savings is going to have to be in liquid cash. I'll try to use term deposits and take advantage of the interest rates and use peer-to-peer money earning vehicles like lending crowd, which don't seem to trigger the same tax issues in US (but maybe they do! that goes on the list...).

Once the currency conversion is more favorable, I'll invest in US funds (not dividend funds!) up to the FIF limit ($50K NZD, not including my Roth and Traditional IRAs), which is about $26K USD ($44K NZD), and then I'm going to have to enter in to a complex world of the NZ FIF regime. I think at that point I'm allowed to invest in dividend funds in the US, because you don't have to pay taxes on dividends if you are in the FIF regime in NZ...

Another option to avoid the PFIC thing is to invest in individual stocks. I guess I could do that in NZ if pressed? But it is unclear if I'd have to convert NZD to USD to do that, at much higher rates and paying more brokerage fees than I can get just going through Wise and then investing via Vanguard.

Ugh. It is so complicated. I hate it. Why am I not rich with a lovely honest tax accountant to take care of all of this?!

Next up: What do I do with my money until I have time to research???