What are your options for building a retirement nest egg?
Shares, term deposits, managed funds – there are plenty of choices when it comes to investing. But, before you hand over your cash, know what’s on offer and what you’re prepared to lose.
The aim of the game is for your investments to maximise your return. All investing involves risk – generally, if you’re competing for higher returns, your level of risk is higher.
If you already own your home, or belong to KiwiSaver, you’re in the investment game. But there are other options ranging from conservative term deposits to more volatile shares.
In February, the government’s tax working group released a report on its review of the tax system. If implemented, some recommendations may impact on your investment strategy.
Tip: There’s no such thing as a sure bet – it’s a good idea not to have all your eggs in one basket. By diversifying your investments, you’ll spread your risk.
Weigh up what type of investor you are before taking the financial plunge.
These include term deposits, PIE accounts, bonds and debentures. All involve lending money to a bank or company for an agreed period and, in return, you get a set interest rate.
Always check the credit rating of a company issuing a fixed-term investment.
A term deposit locks your money away. Interest can be paid in three ways: at regular periods through the investment term for longer investments; compounded (calculated regularly and added to the principal); or in a lump sum at the end of the term. Usually you can’t withdraw the money early, or you may miss out on the agreed interest rate or pay a break fee.
A PIE (portfolio investment entity) term deposit is an alternative to a term deposit. A PIE’s main advantage is you pay a lower rate of tax on the interest you earn, depending on your income.
A bond is like an IOU issued by a government, council or company. You’re promised a set amount of interest, called a coupon if you hold the bond to maturity. You can sell a bond early, but how much you get back may go up or down. A debenture is a type of unsecured bond – it isn’t backed by any company assets so can be riskier, but you should get a higher return.
Always check the credit rating of a company issuing a fixed-term investment. Avoid investments that don’t having a rating above BBB- from a recognised rating agency (see table).
GUIDE TO THE TABLE RATINGS can be denoted with a +/- sign to show relative standing within categories.
Managed funds, such as KiwiSaver, pool money from many investors. This cash is then invested by a fund manager. It’s a hands-off way to dip your toes into investing because the fund manager looks after it and takes care of the paperwork. You also get the advantage of economies of scale.
Fund managers don’t do it for love – they charge fees that can vary widely...[and] eat into your returns.
There are five main types: defensive, conservative, balanced, growth and aggressive. As the names suggest, growth or aggressive funds carry higher levels of risk, so consider whether you’re in it for the short- or long-term. Defensive and conservative funds play it safe and keep most of your funds in bank deposits, bonds and other cash assets.
Fund managers don’t do it for love – they charge fees that can vary widely. Fees eat into your returns. Over 10 to 20 years, a small difference in the percentage charged can make a big difference to how big your nest egg ends up.
You also need to consider whether you’re comfortable investing in “sin” stocks, such as casinos, tobacco or firearms. Ask your manager where it’s investing your money and its approach to responsible investment. Look for details on industries the fund screens, rather than general commitments to do the right thing. Some schemes publish a list of no-go companies, such as those with poor environmental practices or human rights abuses.
You can also quiz the fund manager about what it’s doing to support sustainability investing. This targets industries such as green technology, and sustainable agriculture and forestry.
When you buy shares, you’re getting a small part of a publicly listed company. They’re bought and sold on the sharemarket and can generate returns through capital gains (if the value of a company rises) and dividends (a share of the company’s profits). Dividends can be cash or additional shares.
Shares are a riskier option and, because they can fluctuate in value, aren’t for the investment worrier. The main risk of shares is losing all your money if a company bombs and its shares become worthless.
There are also new kids on the block, such as Sharesies, marketing their services to beginner investors who may only have a small amount to play with. There’s no minimum investment with Sharesies.
These companies operate as a middleman between investors, managed funds and exchange-traded funds. As with managed funds, there are fees. Sharesies has a monthly fee of $1.50 to $3 (the first month is free and it’s also free if your portfolio is less than $50), depending on the size of your portfolio, or you can pay an annual fee of $30.
The different funds Sharesies offers also charge fees ranging from 0.34% to 1.3%. You manage your investment on the Sharesies website or app. So, if you’re only investing a small amount, fees will take a fair whack of your return.
Other companies offering a similar service include Smartshares, InvestNow, Simplicity, Superlife and Hatch Invest. Fees vary between funds and some require a minimum investment. For example, Smartshares charges a $30 establishment fee, no annual fee and you need to invest $500 or more upfront. Optional contributions can be regular (minimum $50 per month) or lump-sum (minimum $250).
The plan with rental property is you get a return on your investment from the rent and capital gain.
In the short-term, there may be little or no return from rent after you’ve paid expenses such as the mortgage, insurance, rates, maintenance and possibly a property manager’s fee. And if you sell the property within two years of buying it, you’ll have to pay income tax on the sale.
The other downside is you can’t withdraw the investment quickly – you either need to sell it, or increase your mortgage if you need cash. If you have to sell when the market has cooled, you could be left owing money to the bank even after you’ve paid off your mortgage.
If you’re 60-plus and all your money is tied up in your bricks and mortar, you could consider a reverse mortgage or “home equity release”. This lets you borrow money using your home as security. The lender gets its money back (plus interest) when your house is sold – usually when you go into full-time care or you die.
To be eligible your home needs to be mortgage-free (or only have a small mortgage owing) and you can only borrow a percentage of your home’s value. You can take the money as a lump sum, draw on it as needed, or get regular payments. The last two options can help keep the interest down if you don’t need the whole amount right away.
Reverse mortgages generally come with a lifetime occupancy guarantee, which gives you the right to live there as long as you choose. If you’re part of a couple make sure both names are on the loan document – if one partner dies or moves into care, only those named can stay.
A no-negative equity guarantee ensures you – or your estate – won’t have to repay more than your home’s sale price. If you want to keep something to pay for future care, or have cash for a rainy day, the lender may offer equity protection, so a percentage of your home’s value is protected.
The upsides are you don’t have to make repayments during the loan, you don’t have to leave your home until you’re ready, and you may be able to transfer your loan if you move. If property prices increase, the interest rates may be offset by the capital gain.
The downsides are you must occupy the home, interest rates are higher than regular floating rates, and there are regular expenses that need to be met (such as having your home fully insured and paying rates on time). There are also upfront costs such as legal fees, valuation fees and additional costs such as equity protection and loan discharge fees.
Reverse mortgages aren’t for everyone. Before you sign up get independent legal advice, discuss your options with family members, and consider what you need the money for and how long you intend to stay in that particular house.
SBS and Heartland are the only banks offering reverse mortgages.
Investment is filled with jargon. Our jargon buster clarifies some of the financial terms used in this article.
A group of securities (investments) that have similar characteristics, behave similarly, and are controlled by the same laws and regulations.
A document containing key information to guide your investment decisions.
"Umbrella" superannuation schemes made up of many individual employer schemes.
A collection of investments owned by the same individual or organisation.
A document containing detailed legal and financial information that may not always be included in the investment statement.
A company that’s traded on the sharemarket. This allows the market to determine the value of the company through the trading of its shares.
Investments with a financial value. The value comes from ownership in a publicly traded company (shares) or receiving interest from lending money to a government or corporation (bond).
When the price or value of an investment isn't predictable.