What is the best investment for retirement?
Having a comfortable and enjoyable retirement in New Zealand, where money won't be an issue, and where you will be able to relax, travel, explore hobbies, and watch your family grow, is one of the biggest goals of the working man's life.
Unfortunately, most people can no longer rely on the money they earned while working throughout their lives, once they reach retirement. The cost of everything is always going up, and there are always more things that you need to pay for.
This is why an alternative source of income is recommended, but there is only so much you can do in your later years.
However, one easy way to get to some extra money when you retire in NZ is through investments. Investments are a great way to earn a passive income that will help you finally achieve the dream of having all the money you could ever need without having to work for it. Alternatively, you can earn more by being an active investor, which is really something you can keep doing for as long as you wish.
And, if you get really good at it, you may even have a chance to retire early, and enjoy your life to the fullest. All that remains is to figure out what to invest in, and how to be smart about it. In other words, you need to learn what is the best investment for retirement in NZ.
Finding the balance
When it comes to investing, finding the balance between risk and reward is the key. This is true for retirement investments, as well as any other kind of investing.
The financial market is huge and complicated, and there are many paths to consider. As a result, your first step needs to be getting a proper education. You need to learn about different options, accompanying risks, how to mitigate them, as well as what is the best way for you to take.
This will take some time and effort, but if you are willing to go through it, the results can be extremely beneficial. After all, there are plenty of people who started investing early, and who became quite good at it.
This allowed them to quit their jobs and retire early by making investing and trading their main source of income. You don't have to go to such extremes if you don't feel like it. You can always just casually invest for a bit of extra money, or simply for the future. However, if this sounds interesting to you, it's still an option to keep in mind.
Of course, this will require knowledge of the markets, how to behave, how to recognize different indicators, reduce risks, increase rewards, when to invest and when to pass, and more.
So, with all of that in mind, let's start by listing different options which are considered to be the best investments for NZ retirement.
Retirement investment strategies and options
The first on our list is saving up or investing money for your retirement through the New Zealand government's retirement program known as KiwiSaver.
This is a very easy and affordable way to invest in your retirement years, and most people who join it will likely strongly benefit from it.
It comes as a voluntary savings scheme, set up by the country's authorities, which allows you to contribute a certain percent of your gross wage or salary to the KiwiSaver account. You get to choose between adding 3%, 4%, 6%, 8%, or 10% of your monthly earnings. Plus, on top of that, your employer also has to contribute at least an additional 3%.
That is also not all, as the government provides an annual contribution, as well. In other words, you can get quite a bit of money in there without really having to do it all on your own. Your savings are also invested on your behalf by a provider of your choice. Alternatively, if you do not choose one, New Zealand's Inland Revenue will select one of the nine default schemes of the program for you.
It is really easy to set it all up, and any NZ citizen can use it. There are three ways to join the program, which include:
- Joining through a KiwiSaver provider
- Joining through your employer
- Starting a new job and getting enrolled automatically
KiwiSaver is likely the easiest way to save up for retirement and invest the extra money you may have at your disposal right now, which is why so many in NZ tend to use it.
2) Immediate Annuities
The second solution we have to present to you involves immediate annuities. Now, to be fair, this is not exactly an investment solution, but more of a form of insurance. However, it can provide you with a steady income, which is why we believe it is still a pretty good option, and worth considering.
It works by providing you with income immediately, as the name itself says. Basically, you can buy a ten-year term-certain annuity, which provides you with a steady stream of income for the following decade.
There is not much that you need to learn or do here, and since it starts paying out right away, it is a great solution for those who are already retired.
Of course, this solution might not appeal to everyone, as there are some downsides to it. For example, they tie up assets. Another thing to keep in mind is that you will not be able to fully 'cash out' if you happen to die during the period you have already paid for.
But, this is still a pretty good option for those who are having trouble staying within their spending limit or don't have the appropriate personality type for sticking to an investment plan. It is also a great thing for people who only receive Social Security as their only source of monthly income, so do keep it in mind.
3) Retirement income funds
Next, we have retirement income funds, which is a name for a special type of mutual fund. The way this works is that it automatically allocates your funds across a large and diversified portfolio, which includes things such as bonds, stocks, and alike. The fund often does it simply by owning a certain selection of other funds.
If this sounds complex, it's because it is. However, it is all for a good cause, as the goal here is to produce a monthly income for the investor — meaning, for you.
To put it all very simply, these funds were created with the goal of providing an all-in-one package. The package itself is made to accomplish a specific goal.
Now, some of these funds can be quite different in terms of their final objective. Some have the goal of making as much money as possible, and to do this; they will use some principal to meet the payout targets. Other funds will secure a lower income per month, but their principal will remain untouched.
You can invest in stocks themselves rather easily by using Rockfort Markets' Trader Workstation. It is very easy to set it up and start trading, and there are numerous other benefits to it. For example, the platform features rather low fees, which is always desirable. Fees will keep taking away from your income on every platform, and over time, you will lose a lot. So, the best you can do is ensure that the platform takes away as little as possible, and reduce the amount you have to pay.
There is also a wide product range for you to explore and select what to invest in, and all of it is very simple to find. Simplicity itself is the biggest advantage here so that everyone can benefit from it. Plus, you get benefits such as mobile trading and portfolio management, among others, so there are really a lot of handy features to explore and use at any point.
This is a good thing for people in retirement. They can choose a fund where their principal will remain intact, or even keep it under their own control, and accessible at all times. Meanwhile, they will keep receiving their monthly income — which will go up, down, or stay the same, depending on whether or not they disturb the money by adding more, taking some, or simply not doing anything.
4) Total return portfolios
In the fourth spot, we have an option that is actually a very common and popular way of creating a decent income for your retirement days. It is quite simple, and it revolves around creating a portfolio that would include stock and bond index funds.
You don't even have to do it yourself, but rather, hire a financial advisor who can help you out.
The way it all works is that the portfolio is being created with a design that would allow it to achieve a strong rate of return in the long term. Meanwhile, you still get specific withdrawal rate rules that will allow you to take a certain percentage of the funds back.
This is a very low percentage, only 4%-7% on average. However, after a few years, this amount will grow.
This approach is based on a concept that you are after a 10-year to a 20-year average annual return, which will either meet your withdrawal rate or completely exceed it.
Basically, you may be targeting a long-term average, and at some point, your returns will start changing from the average, and by quite a lot, too.
However, to achieve this, you must satisfy some requirements, first. For example, you need to maintain a diversified allocation, no matter how the year-to-year ups and downs of the portfolio move. Also, in order for it all to work, you need to be disciplined when it comes to your withdrawals. You need to make a systematic withdrawal plan and stick to it.
5) Rental property
Rental property, or rental real estate, is always a good way to get some passive income, and many people use it to live off of this money. Of course, there is some maintenance that you might have to do, and some unanticipated expenses, and even potential damage, are always a possibility.
But, those are the risks of this approach, and before you purchase a property you would later rent, you should really calmly and logically look into all aspects of the purchase and the approach. Try to predict the potential expenses, and don't only include the initial ones, but keep in mind a certain time frame during which you will own the property.
Another risk that you will likely deal with is vacancy rates. For example, if you own a house or an apartment that is up for rent, that doesn't mean that your property will be automatically rented 100% of the time.
Your tenants will likely change, depending on your deal with them, their needs, and the terms you are willing to accept.
Most of all, it is important to note that investing in property is not a get-rich-quick scheme. It is a business that requires a strong initial investment — not only to buy a property, but also to set it up, renovate it if needed, and bring it into a working condition. Then, you need to rent, find proper tenants/users, and ensure long-term cooperation.
Meanwhile, you still need to keep an eye on things, do maintenance if needed, and alike. It is all a matter of the agreements, but this can be a pretty good business if you enjoy this kind of thing, and know-how to get into it.
As always, research is crucial before doing anything, so that you would avoid common mistakes, so remember to do your homework before making any kind of move.
Another path to consider is buying bonds. Now, when you buy bonds, you basically loan your money, with the borrower being either a company, a municipality, or even a government.
The borrower, whoever it may be, they must agree to pay interest for a certain amount of time. Once the bond has matured, you get your money back, and you are free to start the cycle from scratch.
It is a pretty simple concept, and it all revolves around you giving away a certain amount for a certain time. Meanwhile, you get some amount while your money is borrowed by a third party. As for the interest income, or yield, you get it from a bond, and you can turn it into your source of income.
It is great for retirement, especially since bonds usually have quality ratings, which can give you some idea of the bond issuer's financial strength.
As for the length, there are different types of bonds, including short-term, mid-term, or long-term bonds. Some of them can have adjustable interest rates. Others can be bought in the form of a bond mutual fund, or bond ETF.
In other words, there are various options out there, plenty of which are more than worth exploring and considering. You can even use individual retirement bonds and create a bond ladder. That way, maturity dates of bonds can match your cash flow needs in the future.
Lastly, keep in mind that some changes may still be possible. For example, the bonds' principal value may fluctuate and change alongside the interest rates. In an environment where the interest rates will change, you can expect that the exiting bond value will likely drop.
As you can see, there are plenty of different options for you to consider if you are planning an NZ retirement, and many different paths to take. Even with all of these mentioned and explained, there are others — more solutions and possibilities that you can find with proper research.
However, it is important to remember a few key things — they all come with risk, and if anyone tells you otherwise, they are trying to scam you. Also, scammers are everywhere, so be careful who you trust. Always do your homework on people, property, different approaches, and more.
And remember, this is business, not a scheme or a magical solution, so there will be work to do, risk to take, and plans to make.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.