Many savers have been tempted to lock up their loot over the past couple of years as Term Deposits offered their highest rates in more than a decade. However, now that the Reserve Bank (RBNZ) seems to be getting somewhere in the fight against inflation, interest rates are likely to head south soon. And where interest rates go, Term Deposit rates follow.

The consequence for savers is simple: lower Term Deposit rates equal lower returns.

Consider the following table, which looks at the RBNZ’s interest rate forecast over the next two years and what that could mean for someone rolling over $250,000 in a six-month Term Deposit (assuming a tax rate of 17.5%):

RBNZ CIP estimates; TD premiums average over last 12 months

It’s clear that returns are going to get progressively less appealing in the months to come. Yet, even in a high-rate environment, Term Deposits are not the ideal set up for optimising income in retirement. For starters, you can’t touch your money for the term of the deposit without incurring penalties, even in an emergency, and real (after tax) returns are unpredictable and typically lower than the pace at which consumer prices are rising (inflation, in other words).

Term Deposits are no longer seen as an effective retirement income strategy as they do not facilitate the gradual drawdown of savings over time. Few people are fortunate enough to generate an adequate supplementary retirement income from returns alone, meaning capital depletion is essential. If you do chip away at your capital prior to rolling it over into another Term Deposit, your return, and therefore income, would be lower each time.

Specialised retirement income decumulation (or drawdown) funds, like the one at Lifetime Retirement Income, are designed precisely to overcome these limitations and provide a stable, reliable and sustainable retirement income over a long period. To do this, Lifetime seeks to optimise capital by investing in a diversified portfolio of assets, while using risk management tools to moderate the impact of market volatility on returns.

Each customer is unique and so too is their regular fortnightly income payment. To calculate this, Lifetime factors in a client’s starting retirement savings, age, gender, tax rate, lifestyle choices, mortality risk and inflation tolerance. Using the example above, a $250,000 investment with Lifetime could net a monthly income of $1,056, carefully managed to last until age 95, at which point their capital is depleted.