Will you afford a holiday in retirement?

May 2018

A coffee at a favourite cafe, a trip to the movies with friends, a holiday somewhere new – they’re pleasures many of us take for granted in our daily lives. But, are they pleasures you’ll still be able to enjoy in retirement?

Making the most of our later years means making the most of our savings now. So you want to think carefully about where you place your money – not least because, thanks to inflation, that coffee or movie ticket will likely cost more once you reach retirement age. 

Daily Living expenses now and in future


Estimated living expenses in 2018 and in 2048 based on inflation of 2% p.a.

Many New Zealanders prefer to keep their savings in the bank, opting for the security of cash or term deposits. While these have their place – particularly as a low-risk, short-term investment – over longer periods they shouldn’t be the primary home for your retirement savings. Inflation, fees and tax can all erode the value of funds kept in the bank over time. Tying up all of your savings in one place means you’re potentially missing out on opportunities to grow your money elsewhere.

Keeping money in the bank and waiting for interest rates to go up, could mean missing out on considerable earnings over time

$20,000 invested in 1996 in term deposits or cash in the bank compared to NZ shares or a combination of cash and shares have very different outcomes looking at the balances today. Inflation has over time eroded much of the gains from cash or bank deposits.

NZ Shares, although a higher risk investment has outperformed many other investment options. A portfolio of equities will over time likely include wins as well as losses, however quality companies will likely pay dividends over time adding to returns. Those who have waited for interest rates to go up while keeping their money in the bank have missed out on earnings from their money.

The earnings gap over time (1996-2018)

Line Chart

The difference in balance after 20 years (1996-2018)

Asset classes 

Source: Reserve Bank of New Zealand, Bloomberg.
Share returns are calculated using the NZSE Gross Index. This index, included gross dividends from 1996 to 2000 and net dividends since then – on balance it includes dividends reinvested net of tax. The six month term deposit rate and the cash rate (90 day Bank Bill) were sourced from the RBNZ, tax has been deducted from interest at a rate of 30% and interest has been compounded. Inflation has been calculated using CPI data.

Equities or shares,” says QuayStreet Asset Management’s Andrew South, “are proven over time to outperform savings in the bank, and the New Zealand market in particular has experienced strong returns in recent years relative to other types of investments.”

South, who is QuayStreet’s Australasian Equities Investment Manager says: “The earlier you can get into equities the better. Time spent in the markets is one of the important factors to success, as it allows investors to take advantage of compounding returns.”

“Where many people fail is they start investing in the markets when it has been performing well for a number of years, then they get cold feet and get out at the first bout of volatility. People will say ‘timing is everything’ but if you’re in the markets for the long haul, that’s not so important. Time plays a much larger role in determining success than trying to correctly time short term gyrations in markets ” he adds.

Invest consistently to take advantage of market opportunities and smooth returns over time

By investing a fixed amount at regular intervals, regardless of the price, you will by default purchase more shares when the price is low and less shares when the price is high. This consistency in investing can help you take advantage of buying opportunities at times when markets are low and can help achieve more stable returns overtime.

Bar chart

The outcome

Assume you would like to invest a $100 every month by buying shares in a particular company.
As shown in the chart below the share price over the year has been volatile ranging between $13 and $8, dictating the number of shares you have been able to purchase for your $100 monthly contribution.

For you the average purchase price is $10.36 over that year, whilst the share price at the end of the year is $11.50, resulting in a return of 11% on your total investment.

Looking at average returns over the past five years, QuayStreet’s NZ Equity Fund is one of the country’s top performing retail KiwiSaver funds, according to the FMA KiwiSaver Tracker1 as well as the the Sorted Fund Finder2. Last year the fund delivered a 25.2% return per annum before fees and tax (22.8% after fees and 28% PIR tax). It’s one of 10 funds managed by QuayStreet, and one of a number of ways investors can gain exposure to New Zealand equities through the fund manager in a way that fits their particular risk profile. [1] FMA Tracker Link [2] Sorted Link

"The strong performance with New Zealand equities comes down to a number of factors, including diversifying across industries; investing in good companies and sticking with them for the long run; and the track record and experience of the investment team" says South.

“We look closely at the investments we choose, assessing companies from different angles and if they pass our criteria, we will invest and continue to monitor the business model for any changes. This is what we do every day,” he says, “it’s what we live and breathe.  However, we don’t become attached to our selections, if the investment case changes we will not hesitate to sell.”

“Although there are benefits in keeping some money in the bank, quite often people don’t take into account the erosion of capital caused by inflation and fees charged. You may be retired for a long time so it’s worth looking beyond bank savings at options which will give you greater return potential” South concludes.

Find out more about the NZ Equity Fund >

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