16 August 2016

The first thing that needs to be said is that banks are not the bad guys.

Why the bank is not your friend

The first thing that needs to be said is that banks are not the bad guys.

 They generally do a good job of keeping your money safe. They have branches and internet banking facilities that make it easy for you to manage your day-to-day spending. Every New Zealander should have a bank account (and just about everyone does).

 But here’s the catch. If you’re looking at retirement income, your bank may not be the best place to keep your nest egg. Here’s why:

1. Term Deposit interest rates are low – and likely to stay low.

We have entered a strange era in banking. Since the Global Financial Crisis (GFC), the world has been awash in cheap credit. Quantitative easing (otherwise known as flooding the market with government bonds) has meant banks can access billions of dollars without lifting a finger.

In New Zealand, this low interest environment has been underpinned by a low OCR rate. So the banks have not had to offer a high interest rate to attract your nest egg.

Many people thought this would be a temporary state of affairs. They’ve been proved wrong. In March 2016, Mario Draghi, head of the all-powerful European Central Bank, announced that its deposit rate was being cut to minus 0.4 percent. People in some European countries are now getting negative interest. That’s right – they’re paying their banks for the privilege of having a Term Deposit.

It’s not quite that bad in New Zealand at the moment – although the OCR is at record low levels and not predicted to rise. If you’re hanging out for a return to the days of 8% interest on your Term Deposit, you’re going to be severely disappointed.

2. No guarantee of stable, long-term income.

The beauty of a Term Deposit is its simplicity. You give the bank your money for an agreed period. At the end of that period you get your money back, plus some interest.

Then you do it again, and again, and again, over the succeeding years.

Have you spotted the flaw yet?

That’s right – you’re at the mercy of whatever interest rate the banks feel like offering whenever your deposits mature. Over 20-plus years of retirement, you have no idea what the banks will be offering to pay you for the privilege of looking after your money a few years from now.

In a low interest rate environment, as described above, that could be an expensive error.

You can’t really blame the banks for this. They’re not in the business of helping you manage your finances over a decade or two. Their Term Deposits have no element of insurance or even a guarantee to provide a sustainable return over the long term.

3. A Term Deposit is safe. But it’s not the only safe investment.

Your bank does very well out of the idea that ‘banks don’t go bust.’ We’ve all seen the misery of collapsing finance companies and squandered investments over the years. Putting money in Term Deposits has proved a much safer option.

But is it the only safe option?

What if you could place your nest egg in a fund that included ‘longevity insurance’ so you could never outlive your savings? You would receive a regular, guaranteed income for as long as you lived, plus the peace of mind that your money would never run out.

Even if you lived long enough to receive your telegram from the Queen, you would still receive the ongoing monthly income that was promised when you first retired at 65.

It’s called Lifetime Retirement Income, and we think it makes a lot of sense for Kiwis.

Want more? Get a quote.

 If you have a Term Deposit about to mature – or if you’re just interested to see how much you could receive every month with Lifetime Retirement Income – the first step is to get in touch.