Investment Returns
and Interest
Rates

Responsible Investing, Ethical Investing, ESG factors or Sustainable Investing

Helping our clients to understand that their investments are 'not doing bad' is important to us at Moneyworks. Research studies are increasingly showing that businesses that care about the Environment (E), Social (S) and their Governance (G) (ESG), are able to increase their returns to investors over time.  

ESG or responsible/sustainable/ethical investing is a different approach to the historic focus on short term profits at all costs, and along with our clients, we care that the businesses that we invest in care about these factors.

Moneyworks and our advisers are members of Responsible Investment Association Australasia (RIAA). Over the next 18 months, we are all pursuing the completion of the RIAA Certification, which involves completing the United Nations PRI (Principles of Responsible Investment) Academy courses and incorporating our learning into our business and investment processes.

While we already review  and monitor our fund managers approaches to ESG investing (which is also referred to at present as the interchangeable 'Responsible Investing', 'Sustainable Investing', 'Ethical Investing'), we believe that membership of RIAA and Certification will improve our processes and ability to understand what is actually happening in this area.

We look forward to sharing our knowledge, understanding and learnings with you in this rapidly changing area of investment expertise.

Investment returns and interest rates do matter

To achieve your retirement savings goals, and to get through retirement, you need to understand how investment returns work.

It is important to know how to compare the assumptions in any articles that you are looking at, and make sure that you are comparing like with like.

The first step is to start thinking about investment returns after tax, after fees and after inflation. (link to article on inflation, tax and fees)

Inflation means that your money will be worth less and buy less in the future, as prices go up each year.  Taxes reduce the return to you as you legally have to pay taxes.  For many of the investments that you will use to get you to and through retirement, you will have to pay fees.  It is important that you understand what your returns are after these three items.

For our clients, Moneyworks advisers always talk in after tax, fees, and inflation returns when we are doing our retirement savings analyses, and working out how long their money will last them.  These returns range from 1.00% to 2.50% - and each return will be personal to each client as it will depend on their tax rate when they are earning and then when they are no longer earning.

The second step is to understand how much different an extra 1.00% (after tax, fees and inflation) return can make to how long your money will last for.  

The table below shows you how much difference 1.00% per annum will make if you have $50,000 invested for 30 years. 

After tax, fees and inflation returnAmount you will have in 30 years, if you invest $50,000
0.00% pa$50,000
1.00% pa$67,392
2.00% pa$90,568
3.00% pa$121,636
4.00% pa$162,170

Assumptions: $50,000 invested for 30 years with these after tax, fees and inflation returns, compounding.

The third step is to understand how much additional risk you have to take to get those returns. 

For example, if you currently invest in a term deposit for 3.50% - there are no fees payable, but if your tax rate is 33.00% - your after tax return is 2.35%.  Inflation is currently around 2.00%.  Therefore, a term deposit will give you an after tax, fees and inflation return of 0.35% - not even on this table.  (If your tax rate is 17.50% - the after tax, fees and inflation return is 0.68%).

What this means is that you will have to save more money to provide for your retirement as your money won’t be working for you, than if you get extra returns from your investments.

On the other hand, to get a return of 4.00% after tax, fees and inflation, the total actual return that you would need to get (at a 33.00% tax rate) is actually 10.80% (on average each year).  This is a very aggressive and high risk profile – we only have one or two clients that fit into this category.

If you are a Balanced investor, then you should be looking at a return after tax, fees and inflation of around 2.50% pa.

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