Investing in Retirement
One of the biggest challenges in retirement is how to invest your money to provide an income while still protecting yourself
against the eroding effects of inflation and income tax. Investing in fixed interest gives certainty of income but returns will be low and unable to keep up with inflation. The alternative, investing in growth assets such as shares and property, will give a better return over the long term but with increased uncertainty in the short term. For that reason, many retirees are afraid of investing in shares. However, there is a way of structuring your portfolio so you can use both income assets and growth assets to advantage. Here is how you do it.
Divide your portfolio into three amounts. The first amount is a lump sum of cash that is the equivalent of 6-12 months worth of income. For example, if you need $1,000 per month to top up your income, set aside $6-12,000 in cash. This amount should be placed in a high interest on-call account.
The second amount of money should be the equivalent of 1-3 years income, so in our example you would set aside $12-$36,000. This should be invested in fixed interest investments which are of good quality.
The third amount to be invested is whatever is remaining after setting aside the first two amounts. These funds should be invested mostly in growth assets with a small amount of fixed interest.
The way this strategy works is that over a three or more year time period the gain from your growth portfolio can be cashed up and put into your income portfolio to keep both portfolios constant. The interest from your income portfolio can be put into your on-call account to keep it topped up, along with proceeds from investment maturities as required.
Tips for Home Buyers 
For first home buyers the next few months are shaping up to a good time to buy and there are three reasons for this. Firstly, we are seeing a decline in property prices as winter sets in. Some property investors have reacted to the last budget by choosing to sell and this has had an impact at the lower end of the market. Mortgage interest rates are expected to increase over the next few months and this will help keep property prices in check.
The second piece of good news for first home buyers is that from 1 July, 2010 you can you use some of your KiwiSaver funds for your house purchase providing you meet certain criteria. You must have been a member of KiwiSaver for at least three years and the house you buy must be one that you plan to live in yourself for at least six months. You will be able to withdraw the contributions you have made to KiwiSaver plus your employer contributions and investment returns. As well, you may be eligible for a subsidy of $1,000 for every year you have been a member of KiwiSaver up to a maximum of $5,000. To be eligible, your income and the value of the house you are buying must be within certain limits.
Thirdly, you may also be eligible for a low deposit loan through Housing New Zealand’s Welcome Home Loan scheme. With this scheme, you can borrow up to $200,000 without a deposit and up to $280,000 ($350,000 in some areas) with a 15% deposit on the amount above $200,000. That means you can buy a $280,000 house with a deposit of $7,500 and your KiwiSaver money (contributions plus subsidy) will count towards your deposit.
Now is definitely a good time for first home buyers.
Crunch your Credit
A line of credit, or revolving credit, is a very useful facility to have as part of your mortgage structure. The way it works is that you are committed to pay back only the interest each month and interest is charged only on the amount borrowed. Repayments of principal can be made at any time without penalty and the more you repay, the less interest you pay.
One key advantage of a line of credit is that if you run short of funds you can spend or withdraw up to the limit that has been set. This means that you can pay all your spare cash into your line of credit to keep the balance and the interest down, knowing you can grab it back at any time. If you have a mortgage, the best return you can get for your emergency savings is to ‘invest’ it in a line of credit. The return you get will be the interest you save on your borrowing.
Some mortgage brokers and lenders advocate using a line of credit as a transaction account for receiving income and paying all your living expenses. In theory, this will ensure your loan balance is kept as low as possible. In practice, this system usually fails because unless you are very disciplined it becomes almost impossible to keep to a budget. It is better to instead make a regular payment each payday into your line of credit to reduce the balance.
Some banks are now offering customers the ability to offset balances in a range of accounts, which is a great way to keep your savings separate from your mortgage. You will only pay or earn interest on the net balance of the range of accounts. The more you save, the more you will crunch your credit!
There is a worldwide trend for investors to want to make a positive contribution to the world by investing in companies that are socially and environmentally responsible. If you are passionate about the effects of climate change, the scarcity of food and water, and social or environmental policies in general, then you will no doubt wish to ensure that the companies in which you invest are going about their business in a manner that is consistent with your views.
Traditionally, fund managers have had full discretion to invested funds based on expected financial return, however investors are now demanding more information about where their money goes and whether they are unwittingly supporting the expansion of companies that are harming society or the environment. Responsible investing describes an investment strategy which seeks to maximize both financial return and social good.
In the early days of responsible investing, funds typically used what is referred to as a ‘negative screen’ for selecting investments, which means they avoid investments in such things as tobacco, alcohol, gambling and armaments. Later came funds using a ‘positive screen’ which means they sought out investments in companies whose products are good for society or the environment, such as companies involved in clean technology (eg wind farms or water purification). More recently, fund managers are using a range of environmental, social and governance (ESG) criteria to assess companies. As responsible investing grows in momentum, fund managers are using the voting power they have as shareholders to directly influence the ESG policies of companies an approach sometimes referred to as ‘shareholder activism’.
The evidence clearly shows that companies with sound ESG policies also produce excellent financial returns, so that responsible investors can indeed be rewarded for their contribution. For more information, contact your adviser or the Responsible Investment Association of Australasia
against the eroding effects of inflation and income tax. Investing in fixed interest gives certainty of income but returns will be low and unable to keep up with inflation. The alternative, investing in growth assets such as shares and property, will give a better return over the long term but with increased uncertainty in the short term. For that reason, many retirees are afraid of investing in shares. However, there is a way of structuring your portfolio so you can use both income assets and growth assets to advantage. Here is how you do it.
