Chair, Summer Investment Committee
One of the hardest things in finance is to turn a lump sum into a steady, sustainable income. Most people focus on building savings but there comes a time (retirement) when you want to use those savings to give you an income, and that is not easy – especially in these times of low interest rates.
Traditionally, on retirement, many Kiwis defaulted to bank deposits. In the old days, retirement was relatively short and interest rates relatively high – and so this mostly worked.
Bank deposits are amongst some of the safest investments and when you could get (say) 7%, bank deposits seemed like a fairly good bet. After all, your money did not have to last terribly long as life expectancy was lower.
However, no investment comes without some risk. The Global Financial Crisis (GFC) reminded us that banks can and do fail and, of course, New Zealand is one of the few countries in the world where the Government does not guarantee bank deposits. Moreover, on an after-tax basis, returns from bank deposits can at times struggle to keep up with inflation, even when it's low.
With interest rates now much lower and longevity increasing, bank deposits are no longer the easy single investment choice. You need to get better returns on your savings in retirement to give you a better life and allow your money to last longer. Moreover, with the potential of decades in retirement, there could be a variety of different economic climates and events (recessions, booms, busts, inflation, deflation, a credit crunch etc.). No single investment type will perform in all of those different economic seasons.
When it comes to living in retirement a fully diversified portfolio with a mix of different investment types is important. This is not only likely to give better returns than bank deposits, but it means you are not exposed to just one investment type. If you hold some shares, property, fixed interest and cash you are set up for whatever economic weather prevails – at least one of your investments should perform when the economy changes.
Instead of defaulting to bank deposits, retirees in my opinion should, therefore, consider building a diversified portfolio. This will mean taking advice and, in most cases, having a financial adviser manage the portfolio for you, spreading your investment across investment types.
Advice really is critical – on retirement, your lifestyle becomes dependent on your investments and, unless you have a lot of investment knowledge and skill, you will likely need help. The importance of investment performance at this time of life means you should be wary of a DIY approach.
It is difficult to build an investment portfolio when you have an amount under $200,000 to invest: it is hard to get exposures across a wide range of investments and to get the diversification needed. People retiring with less than $200,000 may find it difficult to find an adviser.
One option to consider is joining KiwiSaver (from 1 July, eligible people 65 and over are able to join KiwiSaver whether they are working or not). KiwiSaver provides a ready-made diversified portfolio and you should be able to find a fund with an amount of risk which is suitable for you.
For people who join KiwiSaver from 1 July and who are over 65, they can apply to withdraw their money either as a lump sum or set up regular weekly, fortnightly or monthly withdrawals and use these withdrawals to supplement NZ Superannuation.
There are good reasons to believe that interest rates are not going back to the levels that we saw before the GFC. In fact, I think interest rates will stay low and we may wait a long time before there is any significant increase.
You might like to discuss the views in this article with your Forsyth Barr Authorised Financial Adviser. Please call your Adviser directly or toll free on 0800 11 55 66.
If you are interested in other investor education insights from Martin visit the Media Investor Education page.
Martin Hawes is an Authorised Financial Adviser. This is not a recommendation to buy or sell any financial product and does not take your personal circumstances into account. All opinions reflect our judgement on the date of communication and may change without notice. Past performance is not a reliable guide to future performance. We recommend you take financial advice before making investment decisions. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page.