6 June 2018
The four best investments for people about to retire
A good investment can help you build wealth, security, and independence. So what are the best investments for kiwis about to retire?
1. Repay any high-interest debt.
This sort of debt is the kind found on credit cards, hire purchase, personal loans, vehicle lending, personal loans, peer to peer lending (often called P2P), or typically any lending which is for consumer goods – not something like an investment property which is expected to increase in value over the long term. These sort of debts nearly always have high interest rates, outrageous administrative fees, and if you have them, are probably a big drag on your future or current cashflow. Quite simply, it’s nearly impossible to move forwards if you’re paying large amounts of interest each month, so these so-called “bad debts” need to be immediately crushed. Common rates for this sort of bad debt are:
- 300% - 400% pay-day loan
- 17% - 27% hire purchase
- 15% - 25% store cards
- 13% - 22% credit card
- 12% - 28% personal loan
- 10% - 22% P2P lending
Debt repayment is still an investment. Investopedia defines an investment as “any mechanism used for generating future income”. By repaying debt, you’ll improve your regular cashflow, and therefore generate net income (this is your income after all expenses are deducted, such as debt repayments) which can be put to better use elsewhere. Repaying debt also essentially achieves a low risk rate of return, reduces your liabilities and risks you’re exposed too, and increases your overall net worth.
Student Loans are usually the exception: New Zealand student loans are interest-free so long as you stay in the country. Because of their interest-free nature, the steady rate of inflation means that in real terms the amount you owe is steadily reducing relative to the price of other goods and services. So, unless you plan to leave the country there is usually no reason to pay a student loan off at anything other than the normal rate.
2. Repay your home mortgage.
For readers who are homeowners, reducing your mortgage is a sure-fire way to get ahead and will reduce what’s usually the biggest payment on your budget. The return offered by paying of your mortgage is tax-free and offers a guaranteed return. (If you don’t have your own home yet, saving for and getting your first home is likely to be your best bet.)
Interest rates charged on mortgages are usually nowhere near as high as the high-interest debts listed earlier such as credit cards and hire purchase. Mortgage rates for the last few years in New Zealand have ranged between 4% and 6% per year. Depending on your tax rate, for an investment to outperform this return it would have to consistently generate about 8% per year before taxation is applied.
The mortgage on an investment property is usually an exception: The low rental yield (income an investment property produces relative to its value) on nearly all New Zealand residential properties means that property investment is largely based on capital gains. Along with tax advantages, this means that it’s not usually required to repay mortgage debt on an investment property beyond the amount necessary to get the property to an approximate breakeven level – when the rent covers all expenses.
3. Join a good KiwiSaver Scheme and obtain the minimum benefits.
KiwiSaver is a voluntary, work-based savings scheme to help New Zealanders save for retirement. It’s been designed to be hassle-free, so it’s easy to maintain a regular pattern of savings.
One of the main benefits of KiwiSaver is the Member Tax Credit of $521 per year, which is paid into your KiwiSaver account so long as you contribute over $1,042 and are over 18. If you’re employed and you’re a KiwiSaver member contributing at least 3% of your salary, your employer will also contribute 3% of your income. Therefore, if you earn $40,000 or more and are making 3% contributions, you should qualify for the annual Member Tax Credit.
However, a key drawback of KiwiSaver is that strict withdrawal criteria apply, which means that in most cases you can’t withdraw funds until retirement or you’re buying a first home. This is where other investments are far more likely to meet your needs and offer you the flexibility that KiwiSaver cannot – for example, if your circumstances change or you’d like the option retire before NZ Superannuation age. Read-on to learn about more versatile investments.
4. Develop a large portfolio of investments to achieve your milestones in life.
Once the three investments above above are mastered, it’s time to start taking serious action towards growing the funds you need to achieve your lifetime milestones – which likely includes growing your retirement nest egg.
The best investment at this point varies greatly from person to person, though as always, ensuring your overall investment portfolio is as diversified as possible is crucial to ensure risks are minimised and that your overall financial position is robust.
The significant array of options available to you at this point have been explored in a lot more detail here.
The bottom line
For most people about to retire in New Zealand, the best three investments are paying off any high interest debts, repaying your home mortgage, and joining a good KiwiSaver Scheme.
After that, the best investment varies greatly depending on your individual circumstances.
This article has been contributed by Joseph Darby, CEO and authorised financial adviser at Milestone Direct Ltd. This article first appeared on the Milestone Direct website. The views and opinions expressed in this article are those of Joseph Darby and not necessarily those of Milestone Direct Ltd. The views and opinions expressed in this article are intended to be of a general nature and do not constitute a personalised advice for an individual client. A disclosure statement relating to Joseph Darby is available on request, and free of charge.
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