As interest rates head down further, different strategies are needed for those in retirement who depend on investment income. It is difficult, if not impossible, to live on NZ Superannuation alone and retirees are feeling the squeeze as their interest income shrinks. Some economists are talking about the possibility of negative interest rates – a crazy situation where investors pay a fee for the privilege of having the bank look after their money. In fact, there are several countries around the world where negative interest rates are the norm.
In this low interest rate environment, there are two key principles retirees can use to deal with the loss of interest income. The first is to plan to spend investment capital rather than just the interest on the capital. This can be very hard to come to terms with as it goes against the grain. After a lifetime of disciplined saving, it is not easy to flick the switch from saving to spending. However, you can’t take it with you, and a planned approach to spending capital should ensure that you are able to maintain a comfortable standard of living without the risk of running out of money.
The second key principle is to diversify away from bank deposits. While term deposits have been the investment of choice for many retirees, they are no longer a safe haven for the long term. After deducting income tax and allowing for inflation, there is little left to provide an income and the purchasing power of the money invested will erode over time. The golden rule of investing is not to have all your eggs in one basket. Having some of your money in a diversified portfolio such as KiwiSaver will give the opportunity to increase investment returns while not taking on too much risk.
