North and South, 18 May 2016

This article was originally published in the June 2016 issue of North & South

How empty-nesters can retire asset rich and cash rich

If you’re a typical conservative Kiwi who’s worked hard all your life, chances are you’ve tried to steadily build your bank balance ahead of retirement.

When the time comes, you figure you can always sell your home, move out of town, trade down and live off your savings. But with bank interest rates the lowest they’ve been in 50 years, it’s almost certain your nest egg won’t be enough to keep you in anywhere near the same lifestyle.

In Auckland, where property values have risen 70 per cent in the past five years, Craigs Investment Partners’ Head of Private Wealth Research, Mark Lister, comes across many people who view their home as their “safety net”. “A lot of New Zealanders are asset rich and cash poor. They’re reaching retirement, maybe sitting on a great property worth $1.5 million, but they don’t have the cash flow or investments they’d like.”

However, with more and more people relying on cashing up their properties, it’s not always a given that you’ll be able to find the right place to live – close enough to the grandkids, for instance. And, if you’re still working, getting the right job in a new location becomes a challenge.

Too many of us are also falling into the trap of simply squirreling away our money in the bank, says Lister, who describes the returns on deposits as “pitiful”.

“Sitting back and doing nothing with your money
might look like the safest thing, but you’re getting left behind.”

Mark Lister, Head of Private Wealth Research, Craigs Investment Partners

In 2007-2008, Kiwis were able to invest in bank term deposits at 8.5 per cent. But today, with rates of just 3-3.5 per cent, we’ve basically taken a pay cut of 60 per cent. “Interest rates are the lowest we’ve seen since the mid-60s – and that’s before tax – so your money is not even keeping pace with the costs of living.”

This default position is very low risk, “but you’re not making any headway, either”.

With interest rates predicted to stay low for the foreseeable future, it’s a challenge for all investment advisers. Lister says it’s crucial we act now to protect our futures – and that means shedding our cynical view of the sharemarket.

“The 87 crash turned a whole generation of Kiwis off shares,” he says. But sharemarket investments are an integral part of any balanced portfolio, he adds.

Lister says corporate bonds are the cornerstone of a portfolio, particularly for those investors approaching retirement.

Bonds provide better interest rates than the bank, low volatility and a high margin of safety. However, he believes growth assets are also crucial for long- term investors. “Even though people don’t want the volatility of shares and property, it may be the best way to grow your capital and beat inflation, while still generating an income in retirement.

“Savings can be decimated by inflation  and even though we haven’t seen any sign of it recently, it would be a brave man to say we won’t have any in the next 20 years. “The New Zealand sharemarket is up more than 80 per cent in the past five years – it has even outpaced the Auckland housing market.”

In constructing a road map for its investors, Craigs experts recommend a diversified investment portfolio, to spread risk across a number of asset classes including shares and fixed interest (high grade bonds). This will smooth volatility and provide a degree of protection should any particular sector decline, or if any individual share or bond drops in value. Craigs also advocates high quality companies with strong cash flow, which pay solid dividends and have shown they can grow their profit steadily, year in and year out.

Sitting pretty chart 1

Sitting Pretty chart 2

Source: Reserve Bank of New Zealand, Bloomberg, Craigs Investment Partners. Share returns are calculated using the Barclays Capital Index form prior to 1986 and the NZSE Gross Index from 1986 to cur rent. This index excluded dividends up to 1986, included gross dividends from 1987 to 2000 and net dividends since then – on balance it includes dividends reinvested net of tax. The six-month term deposit rate was sourced from the RBNZ, tax has been deducted from interest at a rate of 30% and interest has been compounded. Inf lat ion has been calculated using CPI data.

“We spend a lot of time with people figuring out what’s right for them – how much they need to live on and what their risk profile is. Some people can’t get their head around the fact they can’t get eight per cent interest anymore.“People approaching retirement in particular, who don’t have the luxury of time on their side if they get it wrong, can make some foolish decisions and chase the higher-risk investments.”

Investors caught up in the collapse of finance companies a few years ago found out the hard way that pursuing a few per cent more could have disastrous results.

If you need more convincing that you can’t rely on bank savings to keep you in your retirement, Lister’s sums should shock you into action. If you’ve been earning a salary of $90,000 with a take- home pay of $1334 a week, dropping to the single person’s superannuation of $385 a week will leave you with a near-$1000 a week shortfall.

This means you will have to find a way of earning an extra $1400 a week, based on a middle tax rate of 30 per cent. That’s about $73,000 a year. To achieve this, you’ll need an investment portfolio of $1.4 million, generating about a five per cent return.

Lister believes when it comes to the race between tortoise and hare, in the financial world it’s much better to be the tortoise, rather than the hare trying to play late catch-up.

All You Need to Know

  • Craigs IP has 16 branches throughout New Zealand, from Kerikeri to Invercargill – and more than 120 NZX-qualified investment advisers.
  • It costs you nothing to meet with a Craigs adviser to discuss your investment needs and understand the service options best suited to you.
  • Craigs offers free Investor Education Workshops – one to two-hour sessions where you can learn the fundamentals of investing.
  • With Craigs, you have access to one of NZ’s largest research teams of market analysts, providing easy-access reports on companies and other investment opportunities.
  • For more information, phone 0800 272 442