With the Reserve Bank starting to bring inflation to heel, interest rates have begun dropping too. Should retirees with money on term deposit be worried? Not according to retirement planning expert Liz Koh.
In an interview with Radio New Zealand’s Kathryn Ryan recently, Liz said the good news about the current falling interest rates is that the Reserve Bank is getting inflation under control. That’s good for all of us – including mortgage holders and retirees. As retirees spend a significant chunk of their income, they can really feel the force of inflation.
However, for those retirees worried their investments in term deposits will now be bringing in less money, it’s time to reframe this thinking, Liz said in the interview.
“I way I see it is the role of bank deposits is to have somewhere safe to keep your money and somewhere where your money is accessible. Because we all have spending needs throughout our retirement – that’s the whole point of having a lump sum, so you can spend some money to top up your NZ Super.
“The way to look at it is that the money in the bank is there for safety, for short-term needs. It’s not necessarily a means of providing an income for your retirement. If you can reframe it in that way, then the falling interest rates should be less of a concern for people who are relying on other sources than their employment to top up their income.”
Liz said it can be risky for retirees to chase high interest rates, as you can end up in less secure investments. The range of banking institutions we have in New Zealand also comes with a range of credit ratings. The main banking organisations will often have a double A- rating, while banks further down the scale may have a BBB.
“The key thing to remember here is that you’re significantly increasing the investment risk of deposits when you’re going into BBB territory. In fact, the difference between an AA and a BBB rating is about tenfold in terms of the risk that you’re taking,” Liz said.
“By chasing after those high risks, what you’re doing is potentially undermining that safety. Don’t put (your money) in the bank to get a high return. It’s not there for that purpose. My point is, that money is there just for safety and accessibility and your other funds are what you invest for return – in a diversified portfolio.”
Liz encourages retirees to get advice from a financial adviser around how best to deal with falling interest rates, and what that means for their investment portfolio. They need to look at how they can produce a more consistent income where they’re not at the mercy of what happens with the Reserve Bank’s Official Cash Rate.
