In New Zealand, NZ Superannuation is a generous after tax income provided by the Government. At present, this is $30,000 after tax for a couple where both qualify with no means or asset testing.
However, most people wish to have additional income each year, and this is where their investments come in.
Well diversified investment portfolio working for you
As Financial Planners, we work hard to ensure that our clients have an even income stream in their retirement regardless of the investment environment. This involves cash-flow planning and modelling and ensuring that our clients investment portfolios provide an after tax and fees return over the long term that keeps ahead of inflation.
For the majority of our clients, having a comfortable life in retirement means that they will use up some or most of their investment portfolio, leaving their freehold home as an inheritance. Based on our experience and international research, as retirement can be for a time period from 20-30 years, it is vital to have a well diversified portfolio including shares and listed property.
Living off income from a fixed interest portfolio and aiming to retain your capital
However, we are aware that a number of investors (who possibly haven’t had the opportunity to learn about the options from a financial planner) are determined to invest only in fixed interest investments, to retain their capital and live off only the interest earned on their investments.
Unfortunately, when interest rates on term deposits in New Zealand are low as they are at present and are likely to stay low for a long period of time, this philosophy means that these investors will have difficulty paying for all their expenses. It is likely that investors taking this approach will have to start using up some capital, which in turn will reduce their future income streams.
Increased risk to get increased return
Using this approach to managing your retirement capital can end up being a vicious circle, as the only way that you can increase your income stream is to invest in higher returning investments (which, by their very nature are highly likely to have a higher risk).
We have outlined two types of higher risk fixed interest investments that investors seeking return may have purchased or may be considering below.
The vicious circle arises when these increased risk investments fall over. Credit Ratings are a good initial guidance to the risk of the investment. How do Credit Ratings work?
The more risk you take, the more likely your investment is to fail, taking your hard earned savings with it. It is vital that you weigh up the extra return that you are getting for the additional risk that you are taking on board.
While a Balanced investment portfolio has additional risk with Equities and Shares, the diversification can provide you with lower risk than investing in Tier 2 Fixed Interest that – while it doesn’t fluctuate in capital value, could fail entirely and lose all your funds.
We have listed below a range of blog posts that we have written on Term Deposits and Fixed Interest Investments to highlight the risks that you face by increasing your risk and return on a Fixed Interest only portfolio.
If you would like to discuss the options of creating a well diversified portfolio and a plan for managing your retirement capital with one of Moneyworks Financial Planners, contact us by clicking here.
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For more blog entries that you might be interested in:
By Carey Church