“How to generate sufficient income to survive retirement without scrambling the nest egg”
A limited number of us enter retirement with a nest egg which we hope is sufficient for us to live out our retirement years comfortably.
Statistics New Zealand inform us that we can now expect to live a lot longer than previous generations. So, with continuing medical advancements, for someone retiring at 65 today, the expectation would be at least another 20 years of life.
“Nest egg” investments must therefore have the following characteristics:
safe and secure;
provide a satisfactory long term income stream.
To maximise income many placed their nest egg savings with a finance company, or in a misguided attempt to “diversify risk” several finance companies. These companies offered interest rates well above New Zealand’s main banks. But, as we have so very clearly seen, as finance company after finance company has collapsed, with high returns comes risk.
Many New Zealanders now face the prospect of a long retirement with a much smaller nest egg, with the worst of having just the Government pension which is meagre now and is likely to become more un sustainable in the future.
Most of those that have been fortunate to avoid loosing significant amounts of money are, at least for the time being, protected by the Government’s new deposit guarantee scheme.
Having achieved safety the next issue to contend with is generating a satisfactory long term income stream.
Whilst the government’s strategy of slashing interest rates helps those that have debt, for those who have cash and are reliant on the interest income, their returns have dropped dramatically.
Investment returns for government guaranteed deposits are now generally between 6% and 7.5% before tax, with the expectation from some leading economists that the Government’s official cash rate (OCR) which is the underlying basis for short term interest rates will drop a to 4% during 2009. This means we can expect deposit rates before tax of below 5%.
In order to maintain income the investor starts drawing on small amounts of capital which means the investment gradually generates less income and the investor then draws more capital to sustain their current needs. This spiral gradually increases with more and more capital being withdrawn.
Recent years have seen very low inflation rates and therefore its impact on our spending power has only been moderate. However, as prices gradually increase, unless income increases to match it - which for those employed generally occurs though corresponding salary increases – the purchasing power is less and less. The choice therefore becomes either accept that the funds won’t purchase the same goods and services, or like the low interest trap, draw capital to supplement income.
However, with inflation there lurks a far worse danger than the low interest trap, as not only is capital being withdrawn to supplement income but the value of the residual capital is being eroded.
So other than being very distressing, where is this going?
In short the answer for those fortunate enough to retire with a nest egg, leaving it in the bank or with a finance company is not the answer – even if you have the guarantee of Government. Whilst your capital many appear safe it will eventually be eroded by the combination of;
- having to make capital drawings when interest rates are low to supplement income;
- having to make capital drawings when the purchasing power of the income is not sufficient to accommodate gradually inflating prices;
- lower income from a reduce capital amount where drawings have been made to deal with the above; and
- erosion of money through inflation overtime
So what is the solution?
Lets go back to why property has traditional been the chosen investment in New Zealand.
Property brings with certain key characteristics in particular;
- Security - unlike shares or the complex financial derivatives that seem to be the route of the “credit crunch” as a physical asset it can be touched and we are all at least partially familiar with property ownership
- Inflation proofing income – rentals increase over time, not necessary in line with inflation however the overall trend, particuallarily in times of high inflation is upward
- Inflation proofing capital
What then puts investor off purchasing investment property?
For some it appears a complex investment, finding the property and the right professional assistance
dealing with tenants, in particular the absence of tenants or their behaviour, and other property related issues
How then can Catalyst Help?
Catalyst2, is part of the Ray White Group. That means you are dealing with one of the oldest and largest real estate firms in Australasia. Catalyst2 will source brand new or nearly property at or below its value as determined by an approved registered valour. We specialise in this type of property as maintenance issues are less in new property.
Importantly Catalyst specialises in providing investments leased to HNZL. What this means is a government owned company will be your tenant, typically for a term of 10 years, with a right to extend for a further 5 years. This ensures that you will receive a market rent week in week out for 52 weeks of the year, for up to ten, possibly 15 years - whether or not the property is occupied. This overcomes many of the issues of being a landlord.
Catalyst, along with your advisors, will be able to help you asses the risk and returns from an investment, select and manage an investment that suits you. Our financial forecasts will show you your likely net return allowing for our estimate of all the costs you may incur. This includes an allowance for repainting and recarpeting as well your annual accountants costs.
If you want to know more about
- Housing New Zealand leased property investments
- Protecting your nest egg through property investment
Contact Tanya Kwasza
021 59 39 39
Catalyst2
