The Official Cash Rate is now at an all-time historical low of 1.0%. Savers who have traditionally relied on term deposits to provide a reliable income stream are now facing the prospect of ongoing low rates of return. Those who elect to use longer terms to secure higher rates also face the issue of potential early withdrawal penalties if their circumstances change unexpectedly.
Term deposits are now less than 3% for people with the ability to lock those funds away for periods longer than one year. But this is a long way from the 6%-7% on offer 10 years ago. For retirees who use returns on term deposits as their main income, this is causing a real problem, with no easy solution. Expectations of lower rates may be something that we all need to get used to as they could be this way for some time to come.
We talked to two experienced investment advisors at JMI Wealth, a North Shore-based company which has provided sound investment advice for more than 30 years on over $2 billion of client funds. JMI Wealth has a strong reputation and references from clients.
Lynette Ball and Shameema Shameem have many years of experience in the financial services and banking sectors. They offer their thoughts on what investors could consider.
Lynette says that “Investing can be a complex and sometimes confusing process. My aim is to simplify this process so that my clients are comfortable with the solutions I am recommending. It is not easy and there is no silver bullet. If you want to achieve a return, you need to take some risk. Even investing with a bank carries some risk, albeit very low. Many of my clients are retirees and therefore have a specific amount of money that they would like to last their lifetime.
“Even a very small amount invested in good quality companies listed on the New Zealand share market can produce income over 5%. The key is feeling comfortable with how much risk a client is prepared to accept for the income that they require.”
“Bank term deposits are realistically low risk when compared to most other investment opportunities,” Shameema adds. “The downside is that to receive a higher rate of return you need to have that locked away for over two years. A well-diversified portfolio of cash, bonds and a small amount of shares can provide a reliable income stream for an investor. The capital value may fluctuate over time but as long as someone can look at the timeframe as over five years any short-term movements become less material.”
“Creating wealth is one thing,” Shameema notes. “Preserving and growing it is another. My goal is to establish and build a lasting relationship with you and your family based on trust and quality advice, and help you protect and grow your wealth while reducing the time and effort you need in managing your financial life.”
Lynette says that her biggest concern is that people substitute shares for term deposits without seeking professional advice. “Investing a portion of funds into high yielding shares may be suitable but taking advice on what shares and how much is so important.”
Then again, adds Shameema, doing nothing is equally risky. “A client having their savings in low interest rate products could mean that after tax and inflation they are receiving zero return. This might be fine for some people but most need their funds to work for them so they have a comfortable retirement, or build towards a comfortable retirement. By having a conversation and understanding what might be possible I feel there is a better outcome for most people.
“There are options for people to consider when the income from term deposits and high interest savings accounts is not sufficient. Having a qualified financial adviser help you construct a portfolio that is appropriate to produce a reliable income stream is becoming more important as we see such low interest rates. With a sound investment plan, it is possible to achieve higher income returns with an appropriate level of risk.”
Contact: Lynette Ball, M: 027 569 8694, lynette.ball@jmiwealth.co.nz
or Shameema Shameem, M 027 201 2877, shameema.shameem@jmiwealth.co.nz
