INSIGHTS

Today, based on the term deposit rate of 1.0% (as at end of July) you would need a staggering $4 million to generate an income of $40,000, compared to $475,000 in 2007.

With the economy having recovered strongly from the events of 2020, the Reserve Bank is paring back its monetary stimulus programme.

Interest rates are set to rise from record lows, and we’ve already seen mortgage and term deposit rates increase in recent weeks.

However, this will be a gradual process and interest rates are still likely to remain below historic averages for an extended period.

In the meantime, what options are there for New Zealanders relying on their investments for income?

1. You can adjust your lifestyle and spending habits to match the lower levels of income you now receive.

Spending less is a valid option. Many of us spend more than we need to and would do fine being a little less frivolous. The lockdowns have taught us that.

But where’s the fun in that? Especially when you’ve worked hard all your life to retire with a bit of capital behind you. What were all those years of toil for in the first place, if not to enjoy a good standard of living when you’ve hung up your boots?

2. You can modify your investment strategy and seek out higher yielding assets like shares or property.

Another option is to give up on low-yielding conservative assets and shift those funds into shares or property, both of which can offer higher returns.

The New Zealand sharemarket is currently offering an annual gross dividend yield of 3.5 per cent on average, with some sectors (such as listed property or utilities) and companies much higher than that. Similarly, according to the Real Estate Institute the rental yield on an Auckland property is 2.8 per cent, while some regional towns would be higher again.

In addition, both shares and property have historically provided attractive capital growth on top of those income returns.

There’s a catch though. Dividends and rents are far from guaranteed, while in the short-term capital growth can be non-existent or even negative. The last thing you want is to be in the position of needing to cash up your share portfolio or to sell your property during a rough patch.

Moving up the risk curve into riskier assets could be an acceptable course of action, in fact it’s a completely logical one if you have a reasonable time horizon. Just don’t overdo it. Not every bear market will blow over as quickly as the one from March 2020.

3. You can stay the course but eat into your capital to make up the shortfall.

Behind door number three is the option to spend the income your portfolio is generating and when you need more, to spend a little of your capital from time to time.

Many Kiwi investors are highly averse to this approach, having trained themselves to think of the capital as sacrosanct.

We need to adjust our mindset though. The total return (which is the combination of the capital gains and the income) of an investment portfolio should be considered a pool of income available to be drawn on as required, not just the interest or dividend payments.

One of the best things about shares is their liquidity, which means you can sell small parts of your holdings easily and cheaply. You can’t do that with many other asset classes, and investors can use this to their advantage when managing cash flow and income requirements.

A key advantage of this approach is that there is no need to dramatically adjust your investment philosophy or risk profile, for the sake of boosting yield.

Viewing returns as returns – regardless of where they come from – means you can maintain a well-balanced portfolio of assets that matches your tolerance for risk and continue enjoying the good things in life.

What a balanced portfolio might look like:

Craigs’ Balanced Portfolio takes a diversified approach, including income as well as growth assets.