Is retirement looming? Have you saved enough to retire comfortably?
Maybe you have KiwiSaver, term deposits and/or some rental properties. Perhaps you plan to release equity from your home to fund retirement. Will these strategies provide enough money for a retirement that could last 30 years?
A changing world
“There is commonly a gap between what Kiwis need to save for retirement and the money provided by New Zealand Superannuation,” says Mark Brown, head of fixed income at Harbour Asset Management. “For many, NZ Super is simply not enough for anything more than a budget retirement.”
At the same time we’re living longer – to 87 on average – which means we need to save more and stretch those savings further.
If you’re aged 35-55, there is still time to adopt healthy savings strategies. Even if you’re retired, your nest egg can be made to go further.
Many Kiwis make wrong assumptions when planning their retirement. Downsizing the family home, for example, doesn’t always work. “Research from the Financial Services Council shows that people who downsized their homes only released sufficient equity on average to last three years,” says Brown.
Term deposits and residential property investment are the other big favourites for retirement savings and have their pros and cons. These investments may feel as Kiwi as paua and pavlova, but limiting yourself to them could mean falling behind in the savings stakes, says Brown.
On the property front, Kiwis have been blinded by the stellar 75% growth in residential property prices over the past decade. “You just need to look over the Tasman at falls in Australian house prices to see you can’t always bank on price rises,” says Brown. Auckland’s capital growth has flatlined since 2016.
That’s not all. Rental yields are at near-historic lows, according to Core Logic. A yield of 3.3% may not even cover mortgage payments, maintenance, insurance and other costs, let alone generate sufficient income to retire on.
Not enough to live on
As a nation, we also love the stable return of term deposits. Yet, replacing a modest car could eat up the entire year’s returns at current interest rates on $500,000 invested in a term deposit, says Brown. The Reserve Bank of New Zealand has indicated that already-low interest rates may head further down, too.
Putting everything in term deposits also assumes you need to access all your money at once, which most people don’t. Even bond yields are down, so they may not be the answer.
Less risk, more cash: funding the gap
If there’s a shortfall in your savings, says Brown, you must either earn and save more while working or get a better return on your savings.
In order to get that better return and ensure your savings last long enough, you may need a broader mix of investments.
“Investments such as Harbour’s Income Fund spread your capital across a wide range of growth and defensive assets, including shares, listed property and fixed interest. Combined, they work harder but still have defensive investments to preserve your capital.” While investment performance may go up and down, the Fund pays out a regular income, currently at 5% a year, after tax.
Closing the retirement gap
Falling house prices and term deposits have soured the retirement dream for many Australians, but Kiwis don’t have to follow in their footsteps.
Two of the most common ways to fund retirement, term deposits and property, may not always be the best way to fund the gap. Returns from both are languishing and the crystal ball outlook isn’t looking good for the medium term.
Interest on term deposits and property yields are sitting at low single digits, and capital gains can’t be guaranteed, says Chris Di Leva, of Harbour Asset Management.
“Term deposits and residential property investment really are at a low ebb and many Kiwis face being let down in retirement if they think these are the best or only investment options available to them,” says Di Leva.
“Yes, these investments have served Kiwis well in the past. The issue currently is that flat-lining house prices, poor rental yields and falling term deposit interest rates don’t bode well for comfortable retirement,” he says. Retirement can last decades and relying upon a handful of residential properties is putting too many eggs in one basket for a secure retirement. If house prices fall like they have in Australia, retirees could find themselves in trouble financially.
KiwiSaver is a good lesson learnt but what's next?
As a nation, we’re becoming more comfortable with the idea that owning a portfolio containing a mix of shares and defensive investments is an ideal way to increase wealth.
KiwiSaver in particular has helped Kiwis wake up to the benefits of sharemarket investing and the discipline of sticking with their investments through the inevitable ups and downs.
Although KiwiSaver is a fantastic tool to help investors accumulate wealth, the problem for many Kiwis is when they reach retirement they need to turn their savings into an income stream to fund the gap between NZ Super and the retirement income they need, says Di Leva.
Real people, real issues, real answers
“We’re talking about real people who will have less money to spend than they planned.”
Chris Di Leva says “Many Kiwis aren’t aware that the New Zealand sharemarket has had double the return of property over the past 10 years”. That’s 15.3% a year. Yes, shares can go up and down, but the reality is that over time they have delivered enhanced returns to local investors.
“One way to secure your future income is to invest in a portfolio of quality shares and bonds. Often the simplest way to do this is via a well-managed, diversified fund such as Harbour’s Income Fund, which is designed to provide growth but at the same time protect your capital from volatility,” says Di Leva.
Making your money go further
“Funds provide the opportunity to have a regular tax-paid income from a lump sum investment,” he says. “You still own the capital and can withdraw lump sums whenever you want. You can’t do that with property. You can’t just sell the bathroom or lounge when financial needs arise.”
The Income Fund invests in a combination of corporate bonds, dividend-yielding equities, listed property and infrastructure stocks. It has proved popular with individual savers, retirees, iwi, trusts and foundations.
The fund balances high-earning growth investments that continue to compound against steady-as-she-goes defensive investments designed to weather the storms.”
For more information, visit harbourasset.co.nz.