With interest rates so low, are your savings going backwards?

With interest rates at record lows and set to stay that way for the foreseeable future (RBNZ Governor Adrian Orr has recently said he expects them to hold steady until at least 2021), many New Zealanders may not be getting the returns required to fund their retirement.

At the time of writing, one of the big four banks is offering customers 2.00% pa on funds held in a savings account - this may not sound like much but at least your wealth is increasing, right?

Unfortunately, this only partly true. Interest income is usually taxable (for many Kiwis this is 33%), meaning the return is immediately down to 1.34%. “Oh well, still positive” I hear you say? Yes, until inflation eats away the rest. Inflation in New Zealand is currently 1.9%, meaning that while your savings may have increased by 1.34% over the year, as the cost of living has increased by 1.9%, your purchasing power has actually decreased by 0.46%.

If you were to place the funds in an illiquid investment such as a term deposit (the same big bank has a 12 month rate currently 3.40%) the after tax/inflation result is at least positive at 0.38%, but still well below the required return most people would like in retirement. Some people who have realised this have turned to property as an investment.

For others, the risk of having such a high proportion of their investment value tied up in one asset is often too much to bear – we only need to ask current homeowners in Sydney and Melbourne how quickly and sharply prices can fall.

So what is the right strategy?

Well this will vary drastically depending on your financial position, risk profile and other circumstances so I would implore everyone to seek advice from a qualified Authorised Financial Adviser (AFA). Unfortunately, investing does not a have one-size-fits-all kind of strategy and most clients we see don’t fit neatly into a “growth” or “conservative” model. They have individual circumstances and goals, and working with their Adviser will develop a portfolio that meets their income requirements while reducing risk by diversifying between many assets.