Falling rates a challenge for savers


The Reserve Bank's surprise decision to cut the Official Cash Rate would have been met with a smile by many borrowers -- but it won't be such welcome news for savers.

Collectively New Zealanders have around $141 billion in savings and term deposits.

Although the returns are lower than some other investments, many people like term deposits because they are seen as less risky and offer the certainty of a fixed interest rate.

Canstar says that its database shows that savers can earn up to 3 percent in an online savings account at the moment. But the average rate is 1.66 percent. Canstar says is the reason that it advises savers to shop around for the best deal.

It says it is possible to lock in a rate of up to 3.75 percent for $25,000 at 12 months.

But where term deposit rates go now is unclear. Canstar says that term deposits do tend to price in expected future rate cuts.

The Reserve Bank has signalled that there will be one more cut this year. But economists at ANZ are predicting that there will be two more cuts before Christmas, taking the OCR to 1.75 percent.

The lower savings rates are one of the reasons that the New Zealand sharemarket is hitting new highs. Investors are attracted by the dividend yields of around seven percent offered by some companies.

The trend for deposit rates has been down.

The Auckland Property Investors' Association points to figures from interest.co.nz that show that ten years ago the average one-year term deposit rate was 6.914 percent. Now, it is almost half that, at 3.47 percent.

This means that on a $500,000 term deposit, the annual gross return today is $17,350 per year (or $1,446 per month). That is down from $34,570 per year (or $2,881 per month) ten years ago.

Cashflow in retirement

The Auckland Property Investors' Association says liquidity in retirement is quickly becoming the issue nobody wants to talk about.

Association President Andrew Bruce says "it is such a universal issue, we need more public dialogue and education about how to look after our financial wellbeing and plan for the day when the paycheques stop coming in."

It says people need to think "strategically" about retirement.

The Association has five tips for people to help them start thinking about saving for retirement. The advice applies to a range of investments beyond just property.

1. Understand how much you need to retire on.

The Association says accommodation, insurance and healthcare costs are the big ticket items, but people should also remember other "lifestyle goals."

2. Maximise your return streams

When comparing investment assets, it says you should have a think about how many streams of return the investment will give you.  The Association says a savings account offers a cashflow (interest) return while a rental property offers cashflow (rental) return and a capital growth return.

The Association does not mention equities. But like rental property, companies that pay dividends offer both an income stream and the potential for capital growth.

Of course both rental properties and shares have the potential to go down in value for periods of time. That is an example of why people should always try to diversify their investments across a range of asset classes.

3. Control

The Association says all investments have to be managed.  It says you should ask "who is managing your investments for you?" It recommends that you "do a due diligence on the person or company you entrust your savings with and keep a close eye on their performance throughout the lifetime of the investment."

4. Potential for growth and reliability

The Association says that because people are living longer, strategic retirement planning has to take a long term approach.  "It is no good if your investment pays for your retirement for the first five years and then the return starts dwindling from year six onwards," it says.

Research your investment and make sure that there is good potential for growth and the robustness of its return is sustainable.

5. Start today - No one is too young to be planning for their retirement.

The Association says "if you feel overwhelmed thinking about your retirement then it is a sign for you to take action now."

The www.sorted.org.nz website is a good starting point for people wanting to learn more about saving and investing.