Falling interest rates causing cracks in nest eggs

Falling interest rates causing cracks in nest eggs

The Reserve Bank’s latest move to cut OCR serves as a reminder that New Zealanders have to start thinking more strategically about retirement, says the Auckland Property Investors Association.

“Gone are the days when Kiwis can expect to simply live off term deposit interests once you stop working,” says association president Andrew Bruce.

“Ten years ago this week, the average one-year term deposit interest rate
was 6.914%. Today it is nearly half that at 3.47%*."

This means that on a $500,000 term deposit, the annual gross return today is $17,350 per annum (or $1,446 per month) down from $34,570 per annum (or $2,881 per month). “And that is assuming that you have half a million to put in a term deposit to start with,” says Bruce. “What this is telling us is that investing for an additional income stream is no longer a luxury, it is a necessity.”

Living in an increasingly debt-driven culture, liquidity in retirement is quickly becoming the bogeyman nobody wants to talk about. “But it is such a universal issue,” says Bruce “we need more public dialogue and education about how to look after our financial wellbeing and plan for the day when the paycheques stop coming in.

"That no one can afford not to take control of their financial destiny when the paycheques stop coming in. New Zealanders have to become more financially literate and proactive in terms of planning for our future.”

In light of the latest pressure on savings interest rates, here are five top tips from the Auckland Property Investors’ Association to help you start thinking strategically about your retirement:

1. Understand how much you need to retire on - “Most people underestimate how much they need per year to live on.” says Bruce. Accommodation, insurance and healthcare costs are the big ticket items but also don’t forget about your other lifestyle goals and how they translate monetarily onto the balance sheet. “Always aim high. We spend so much of our lives looking forward to retiring, it would be a real shame if a lack of cashflow at retirement stops us from doing what we have always wanted to do.”

2. Maximise your return streams - When comparing investment assets, have a think about how many streams of return the investment will give you. "For example, a savings account gives you a cashflow (interest) return while a rental property gives you both a cashflow (rental) return and a capital growth return,” says Bruce.

3. Control - All investments have to be managed. So who is managing your investments for you? Do a due diligence on the person or company you entrust your savings with and keep a close eye on their performance throughout the lifetime of the investment. “Control is a big reason why people like to put their money in property.” says Bruce “A property investor has the ability to add value to his holdings in a way that shareholders often can’t to a business.”

4. Potential for growth and reliability - Because people are living longer, strategic retirement planning has to be a long term approach. “It is no good if your investment pays for your retirement for the first five years and then the return starts dwindling from year six onwards.” says Bruce. Research your investment and make sure that there is good potential for growth and the robustness of its return is sustainable. “Take Auckland properties for example, our long term population projection is telling me that there is going to be a supply and demand imbalance in the investors’ favour for a long time coming.”

5. Start today - No one is too young to be planning for their retirement.
“If you feel overwhelmed thinking about your retirement then it is a sign for you to take action now.” says Bruce, “There are many organisations such as the Auckland Property Investors’ Association that promotes financial literacy and encourages proactive retirement planning. Many banks these days offer their customers basic financial education and free personalised planning sessions to help you set goals and objectives. Talk to a financial advisor, pick up a book, join an online forum, there are many ways these days for to get good quality information you need to start planning for your retirement today."

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