If you are a risk averse investor, retirement at the moment does not come cheap.
With interest rates on savings accounts so low, it takes a lot of money for not much in return. You will need an extremely large deposit if you want to live off the interest from these accounts.
If you have $500,000 in a term deposit returning 1.3%, you will only receive approximately $5,360 per year in income, assuming a 17.5% tax rate. That will barely cover a lot of people’s food bills, let alone all other expenses.
Sure, if you are of age, NZ Super will be a nice addition and $39,000 per year, in this example, may be enough for a married couple both eligible.
But over the years that number will decrease as your savings are eroded by inflation.
$500,000 is a heck of a lot of money to save for a $5,360 annual return.
You could earn the same return from working just 333 hours at $18 an hour (after tax). That is 6 and a half hours a week or 8 and a half 40 hour weeks. Less if you are earning more than minimum wage.
As anyone who has been reading my writing for a while knows, I am the last one to advocate for working more hours. But, if you are terrified of investing in the stock market, and aren’t prepared to take on extra risk, then working two months a year seems like a far more attractive option than needing to have $500,000 saved up for a $5,360 income.
Earning $5,360 a year in work is much easier than saving $500,000. We can’t work forever though, so you will need savings at some stage.
Of course, working is not always an option for everyone due to health or lack of opportunities. That is why it’s so important to start preparing for your retirement as early as possible. Our preferred retirement date is not always our actual retirement date. The decision is often not ours to make.
But in this low interest rate environment, looking at alternative investments or working longer, seem to be much more worthwhile options. If you do take on more risk though, do so with the full knowledge that you can lose money. Whatever you invest in stocks, make sure you don’t need for at least 10 years and ensure diversification.
Looking for returns from our money has always been about getting the best bang for a buck. Savings have no bang at the moment. They do have the benefit of not losing much money, but you still need assets to provide positive returns over time.
If you need help with your personal retirement planning, then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here