Term deposit rates are tightly bunched, but there are still opportunities even when rates are low. We compare where rates are at the start of 2019, and look at some practical options

Term deposit rates are tightly bunched, but there are still opportunities even when rates are low. We compare where rates are at the start of 2019, and look at some practical options
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It is not a great time to rely on interest income from term deposits. Rates are low and don't really look like they will be rising any time soon.

About the best you can say is that, at least, rates in New Zealand are better than in most other developed countries for this type of 'investment'.

And you can also say that returns exceed inflation, even on an after tax basis. Inflation was running +1.9% in the September quarter and has averaged +1.7% over the past two years. The next fix on this key rate is not until January 23 when we will get the December quarter result. (But the unofficial ANZ monthly tracking suggests it will come in somewhat higher given the volatility in the oil price in the October-to December period.)

Even if you are paying income tax at the maximum rate (33%), a 3.45% pa one year rate would net 2.31% which means your investment is keeping up with inflation at +1.9%. (Just don't try to live on the interest however if you wish to maintain the purchasing power of your lump-sum investment.)

$10,000+, at maturity, pa 5-6-7 m 8-9 m 12 m 18 m
New Zealand % % % %
ANZ 3.25 3.40 3.40 3.45
ASB 3.25 3.40 3.45 3.45
BNZ 3.25 3.25 3.40 3.40
Kiwibank 3.45 3.40 3.40  
Westpac 3.25 3.50 3.40 3.45
         
Best NZ main bank 3.45 3.50 3.45 3.45
         
Co-operative Bank 3.20 3.30 3.35 3.40
Heartland Bank 3.25 3.40 3.40 3.50
HSBC 2.90 2.90 2.90  
ICIB 3.40 3.40 3.50 3.60
RaboDirect 3.30 3.30 3.35 3.55
SBS Bank. 3.15 3.20 3.35 3.40
TSB Bank 3.15 3.20 3.25 3.45
         
Best of all listed NZ banks 3.45 3.50 3.50 3.60

You can also say that returns in New Zealand are significantly better than those on offer from the same institutions in Australia.

$10,000+, at maturity, pa 5-6-7 m 8-9 m 12 m 18 m
Australia % % % %
ANZ 2.10 2.70 2.30 2.30
CBA 2.50 1.80 2.20 2.30
HSBC 2.05 1.65 1.95 1.95
NAB 2.10 2.40 2.40 2.40
Suncorp 2.35 2.30 2.55 2.35
Westpac 2.05 1.90 2.30 2.30
         
Best main Australian banks 2.50 2.70 2.55 2.40

In either country, the possibility of getting a meaningfully better rate by shopping around isn't huge. But a quick glance at the tables above shows there are some opportunites.

If you don't use term deposits as your store of wealth, what should you use? There are options:

Firstly, KiwiSaver funds have the advantage of boosted contributions. True, recent market volatility may have knocked some fund values a bit, but if you are in KiwiSaver for the right reason (long-term retirement saving) you should look past that volatility.

Secondly, some people think residential investment property is an alternative, but it is clear there are significant value risks, tax risks (including what might lie ahead from the Tax Working Group), effort risks from managing tenants, legal risks from rising obligations under the upgraded Tenancy Act, and leverage risks (where investors forget that can go both ways). This alternative certainly isn't passive. And liquidity when markets go sour can be a real issue.

Also not passive is the option of investing in or owning a small business, but this is another wealth building option. There are many new 'aternative asset' invetment options these days. Liquidity issues can also be a big negative however.

Annuities might be part of your considerations, as might other types of investment funds (including the low-fee index funds).

The bottom line is that these things are easier on you if you take control of them and do it early. You can't start too early.

In a low interest world, the best asset you may have is the wage or salary from a job. Consider this. How much would you have needed to save to get a return of, say, $70,000 per year, pre-tax? If your term deposit rate is 3.50% pa, then you essentially have an asset in that job worth $2 mln. And that shows what you might need in retirement savings to maintain the same income. As scary as that may seem, the best chance you have is to save aggressively. You probably don't need all of that, as universal NZ Superannuation is worth the equivalent of about $600,000. Saving aggressively will never hurt, and new higher contribution rates in KiwiSaver will soon aid you in doing that.

Meanwhile, if you are a term deposit saver, be thankful for low inflation, and the fact you aren't facing Australian (or US, or Canadian, or EU, or Japanese, or UK) term deposit interest rates.

Also remember, you have the option of decumulation. Reverse mortgages can be part of that, but despite the enticing advertising, be very, very careful about this choice. It could end in tears just when you have no good options.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

56 Comments

I think the LIMP-sum investment might be a typo.....but it may be a reality cheque....who knows ..these days.

Not sure if you have taken this into account, but my BNZ TDs pay interest at maturity whereas my ANZ TDs have an option to reinvest interest at periodic points when the TD term is greater than 180 days, so the effective ANZ rate may be better.

I was hoping for a better sharemarket or housing correction but as that hasn’t happened I will push it out for a year. Based on the above I will checkout ASB for more name diversity in the investments.

Ex Pattacake
You & everyone else waiting for sharemarket correction past 3 years
Don’t expect it will be too much longer though The wait will be rewarded
A job is great but time is your cost

I don't know why many people think about living off the interest of term deposits. To do so would effectively reduce the amount of money in there after taking inflation into account. So its not a big leap to take a bit of principal out of there each year as well. As far as I'm concerned its completely arbitrary how much is taken out.
For interests sake, I've still got some money on a 5 yr Kiwibank term deposit which matures later this year. Its at 5.75%. When I roll it over it will be somewhat less :(

Term deposits still have a place when one is passed being able to work your money in any meaningful way and take what's available for at least some return

You don't need 2 Million in the bank when you retire. By the time you retire you should have that house paid off and your expenses have fallen dramatically in terms of transport and you pickup NZ Super. You need less than a Million and factoring in we have historic low rates, if rates double even less.

That's true Carlos67 but it depends what sort of lifestyle you want. I always planned to have a more expensive lifestyle after work as I have the time. I got out at 56, 5 years ago so spending time between 2 homes in Auckland 1 in city 1 in country, holiday home down south, Motorhome and escaping winter somewhere warm takes a planned retirement. Living in 1 place watching the returns on your TD's (RP) between pension days sounds more like prison the retirement.

Very, very well said Shoreman. Only living off Super and TD's when you finally have time to enjoy life is sad.

It's interesting coming from the UK how little people talk about annuities over here. It's pretty much the default retirement strategy in the UK - give up your lump sum and get a guaranteed, probably inflation adjusted, return for the rest of your life. I'd definitely consider it as part of my retirement, useful insurance policy with higher returns than TDs and much easier to manage than most alternatives.

It seems you're confusing Kiwisaver and NZ Super? They are 2 separate schemes, NZ Super is what you describe as annuity, paid fortnightly (that means every 2 weeks) and indexed for inflation. Kiwisaver is additional and is a lump sump (amount dependant on contribution) paid out at retirement age.

In NZ you don't "give up your lump sum (Kiwisaver) to get a guaranteed, probably inflation adjusted, return for the rest of your life"

Yes, that's my point. In the UK it's quite common to cash in a lump sum for a guaranteed annuity. In fact, it's only in the last few years that it's been possible to do anything other than turn your defined contribution pension into an annuity, and there's been a lot of hand-wringing since the change worrying that people will spend up and run out, which wasn't possible with the annuity system.

Not really Yvil, I quit working at 48 and am now living off my term deposit on its own. Totally depends on what sort of person you are and how practical you are. I can count the number of times I have needed to pay someone else to do something for me on my hands. Certainly I have made different life choices to the majority of people but then its about the choices you make. Many people will find that they will be unable to retire as the super will not cover things and they have no savings at all, thats what you call sad.

You say: "I can count the number of times I have needed to pay someone else to do something for me on my hands"
In my opinion, if you have to do everything yourself, you're not really retired

Yvil, whilst your pedaling backwards under the weight of interest only mortgages, retirement is something only others can enjoy. Your envy of others will only become ever harder to hide....

You are what your worth minus what you owe your Landlord (bank).

you pickup NZ Super.

State super annuation is an unsustainable pyramid scheme.

People under 40 are likely to pay for the pension of those that came before them, but have a high risk of not receiving it themselves.

Why do you think they brought in Kiwisaver in the first place? Our population is ageing, the younger immigrants we are trying to replace them with earn low wages or often don't even pay income tax, it's only going to get less and less affordable to pay for old people to live.

Carlos67, I voluntarily left the workforce at 50. I also live of my term deposits quite comfortably. I travel somewhere overseas yearly and am still adding substantial to the remaining TD principle after all expenses. It's hardly what I call sad ;-) With ring fencing fast approaching, the likes of Yvil and Shoreman are still loaded to the gunnels with interest only loans. Its financial suicide given the current climate.

Posted by Yvil | Wed, 10/01/2018 - 21:24 - "All my loans are interest only"

Posted by Shoreman | Thu, 11/01/2018 - 23:10 - "I have had interest only loans for 35 years - rule 101 for investing"

I have to say you are a strange person keeping posts like a troll it's creepy! Absolutely I have only ever had interest only loans that's what smart people do, work their money and pay of lump sums. Signing up to a P+I for 30 years is for the masses I keep a interest only loan of 7% of my iinvestment wealth to take advantage of taxes. Get a life mate !

Shoreman, calling me creepy is a sideshow created by an embarrassed debt addict whos been been found wanting. BTW, it took just five minutes of my vast leisure time to find the post!

You are a envious old man that tries to bring people down to your level goodbye I prefer to communicate with adults with positive attitudes.

Shoreman, hmmmm, you've said this before but you always return....

Well said Shoreman, I have just been offered 4.00% fixed for 1 year from ANZ interest only. Subtract 33% tax deductibility and I'm paying 2.68% interest.

You must need one hell of a term deposit to live off that interest and travel overseas. I am guessing over a million. Well done.

Thanks. According to Shoreman on another thread, the banks are about to steel it all my TD"s in a "Cyprus" style event too. I'm really worried! ;-)

Rp if you get the big downturn you want then the banks in NZ will suffer and as you know they will take money from every account to prop up their Balance sheet. By the way the EU could have saved the banks in Cyprus but chose not to. Do read up about Iceland very similar.

Ha-ha-ha-ha :) Nah, then your talking complete decimation of property values (-60%). Mortgage defaults en mass, collapsing rents. You can't have it both ways "Oracle".

My target a decade ago when I retired was to have ~$2.5M saved before retiring. The vast majority of the saved funds were from saved wages that were invested in the share market, starting in the mid-80s. I saved quite aggressively, with almost 50% of take-home going into savings. I got "lucky" several times via market timing over the 20 plus years of saving, shifting from growth funds to value funds, to cash and back. Missed the dotcom bust almost entirely, and the major decline prior to that we sold at almost the peak and bought back at almost the bottom. I do not include housing in the mix for investment in that our current house was bought with almost the exact same price as the house we sold a decade prior to the current purchase. Between the aggressive saving, various market shifts, and a rather frugal lifestyle, we now have enough to live quite comfortably on our TD interest, even with the very low rates at present. Of course, I'm not happy that my 5.8-5.9% TDs are maturing this year...

A good target for your required savings for retirement is about 25x your desired retirement income. Make some assumptions about wage growth rate, inflation, investment gains, tax rates, etc. and you can see what the required savings rate is for your target retirement savings. It is very important to save early in your earning career, despite the hardships associated with this dedicated savings rate. A very good example for this was when I did the assessment about whether to buy a new car a few years after I started working. I quickly figured out that even if I bought a very low end cheap car that was worth only a fraction of our combined annual salaries, that purchase would delay our retirement date by over a year. So, no new car for over a decade despite having plenty of money saved. In thirty years, my total car purchase $ adds up to ~$40k. One gets wealthy by living beneath ones means.

Nice :)

Well done Yankiwi for looking after your finances. You say your TD of 5.8-5.9% are coming up for renewal this year, best new TD rates are 3.8% for 5 years, very unfortunate for you, you couldn't have forseen that coming. How will you deal with the 35% drop in your income?

I continue to live below my means... for that matter, since my "retirement" I keep having people ask me to do consulting work so I'm *way* ahead of my predicted financial position. As to that "35% reduction", reference ladder investment. Somehow, I think that I've enough to weather a period of very low TD returns, especially as that has a very high correlation with very low inflation. If there was zero inflation, I could live the remainder of my years with zero interest earned. The happy aspect of this, is that I would get to pay zero taxes and would get good benefits from .gov as well due to the lack of income. Not in that category at present, and we are very unlikely to ever see zero interest here. All I need to do is to stay abreast of inflation and I'm happy with my low risk investments.

The annoying aspect of the consulting work noted above is that I'm on holiday right now and have to work a bit in the evenings. The happy aspect is that a couple hours work pays for nice holiday lodging and some very good meals out. Yesterday was at the Mount, tonight is Kinloch. Had my nice evening meal, now for a bit of work.

Cheers!

" If there was zero inflation, I could live the remainder of my years with zero interest earned"

for someone who thinks they are well positioned, you know nothing about how debt and money works.
ALL investments are DEBT instruments (ious)
ALL money is DEBT (ious)
When debt falls over, there are no clever savers that can weather the storm. Without a functioning debt system supply chains are seized. Which makes your paper wealth like a ticket for a concord flight.

If push comes to shove, all methods of work storage are useless. In that case, what will matter would be what the preppers have been storing years of food for. If we went there, the population of the world will drop by a rather large percentage, and "wealth" storage will not matter. Not sure I want to plan my life around MadMax scenarios, although a little bit of preparation for living through temporary disruptions is appropriate. Your scenario is MadMax... it could happen. I'll bet on the opposite side myself. That bet is obvious, as if I win, you would have money to pay. If you win, the money is worthless! :)

S4AUh, $1 Mill is nowhere near enough to live well off a term deposit. Best rate is 3.8% for 5 years, that pays you $38'000 pa interest per Million deposited, deduct income tax and you're left with $25k. Someone may be telling porkies unless they have a clear $6 Mill deposited at the bank = net $150k income pa

I hope you don't do your accounts that badly.. $1mil @ 3.8% + Super for a single person and you end up with ~$50k in the hand per year. Not huge money, but if you have a mortgage free low mainteance house you can certainly afford to live and travel on that.

lol yeah millenials are all going to get super, just like they could all afford houses.

no-one made any comment about millenials getting super.. Nobody knows what the system will look like in 40years.

the Ponzi some call super will struggle to exist in 5 years let alone 40 ...

see the Death of Debt

https://surplusenergyeconomics.wordpress.com/2018/12/19/142-past-present...

"you might also wonder why we’re not already seeing the debt edifice crumbling. There are two main answers to this. The first is that the debt structure has been buttressed by de-prioritising another form of futurity – simply put, we’ve already created huge (and burgeoning) gaps in pension provision as part of the price of preserving the edifice of debt.

The second answer is simpler still – we’ve not seen the debt edifice start to crumble yet……"

I do my accounts very well Pragmatist, we just have a different view of how much is needed to "live comfortably"

Yet somehow you came to needing $6mil in the bank to clear $100k pa. Yet $3.7million at 3.8% will return $140k gross, or a touch over $100k net (without receiving any super).

I mean you're only out by 62%.. Like I said, i hope you do your taxes better or you might get to experience "fine dining and luxury accomodation" at the Steel Bar Hotel courtesy of the IRD.

lol! Yvil is just trolling. Hes fishing for responses from other commentators to gauge their nett worth - priceless (and desperate)

Yvil, the more you do this the more depressed you'll become!. Stop doing this to yourself! It's more productive to pay off the principal sum owed, not just the interest (Landlord-bank rent) As the market falls further, you'll figure it out eventually......

Yvil,

You need to get a new calculator. If one is earning $100k, one will pay about $24k in taxes. If your goal is $100k after tax budget, then one needs a bit less than $136k of income. Most people look at their current income before tax to estimate their future needs. One could also look at the after tax version as well. Regardless, if one is stuck with only 3.8% return on all of ones investments and one needs $100k after tax, then one would need a bit less than $3.6M, not $6M. If one goes with needing $100k income before tax, then the investment required is ~$2.6M. Of course, it may help if one has a bit of diversification. A small percentage of my investments are in the NZ share market. Admittedly the percentage has grown considerably of late due to the ~100% capital appreciation in the last half dozen years. This capital appreciation has reduced the fully imputed dividend returns based on the current value to a bit less than 10%. If one were to calculate the returns as based on purchase price, the returns are greater than 15% PA.

I live off 25-30k gross right now, which includes paying rent and food for myself and another person. The rest goes to savings/investments.

I also imagine if you have a million dollars as a term deposit you can get a much better return rate than advertised.

Always negotiate... occasionally you get the response that there isn't any possibility for negotiation. Politely finish the conversation and try the next bank. I have TDs in five different banks, one credit union, and whatever it is that you want to call UDC. I am happy to call up and ask them just what their discretionary rates are. My suggestion is to limit an individual TD to $250k maximum, and only if you get an extremely good discretionary rate. This means that you may have multiple TDs of varying maturity dates at multiple banks after you have made your nut and are reducing your risk exposure.

BTW, congrats on living beneath your means and saving for your future!

BTW, congrats on living beneath your means and saving for your future!

Thanks, but it's not enough. Taxes are too high and salaries are too low. The reality is different for my generation, but few of them seem to cotton on - they still believe in fairy tales like the pension being around in 40 years.

Twenty years ago, I made the assumption that my pensions and annuations would become worthless before I would start receiving either. My retirement assessment point assumed zero income from either. If either comes to pass, then I may be a bit more extravagant in my lifestyle. The last decade suggests that I'm not willing to spend anything resembling extravagant. Someday I may learn how to spend... It could happen, this year I finally bought my first ever tv...

The reality is that the savings initially accumulates at a rather low rate, and the growth rate seems quite anemic. At least for the first decade. Then the wonders of compounding, and the happiness of increased saving capability starts to show results. Twenty years on, the results start to become rather apparent (if not amazing).

I'd strongly recommend modeling your income, savings, and investment returns, in a spreadsheet. Look at the wonders of exponential growth. Just note that the early savings really matter, and doing "catch-up" saving later in your career is ineffectual.

The current generation has issues in making a down payment, but has less issue in making the monthly payment once the down payment has been made. Every generation is different, and has different challenges.

Agreed, exponential growth in savings is incredible once it takes off, even more so when you have much higher interest rates.

As for your last paragraph, yes every generation is different and has different challenges but let's not assume that it's all "Samey Samey".

Rp I have in laws that have done what you do sold their business for 4 mil in 2000 put it in TD's what a waste their capital compared to Auckland property is just so sad. It could have grown to 12-15 mil over that time so TD's are just plain stupid as an investment growth of capital plan.But as I have said above they are some sort of return when your passed working your money.

Shoreman, I wouldn't have got to where I am without high returns (a few errors along the way). The key difference between you and I is that I know when to become a spectator. Through sheer greed, some don't know when to pause and complain and blame others when they become victims of their own greed.

Shoreman,

The time to assume risk is when you have a large time horizon. The time to be conservative is when your time horizon is short. In retirement your primary concern should be return of capital, not return on capital. Assume a retirement age of 65, and a death age of 90. Use the past 100 years of annual inflation and investment return and do a simple monte carlo style simulation. Yes, the average return if invested in high risk investments will be much higher when in shares or housing. Now, look at the annual budget available for a 90% probability that your money will outlive you. For a short time horizon of 25 years with a desire for a 90% probability of not being a pauper prior to death, one should be moving to lower risk investments as one gets older. This is standard stuff that any competent retirement planner should understand.

Certainly should be moving to lower risk assets as you approach retirement, but if you retire at 65 and can reasonably expect to live a couple more decades, I'd want to keep some invested in higher risk assets to guard against inflation etc. I wouldn't think it crazy for a healthy 65 year old to still have 50% invested in property and/or shares, and this proportion could be reduced further over time.

The classic rule is to subtract your age from 100, and the result is your share percentage vs bonds (if 100, then at the age of 65, 35% should be in the share market). Some now think that this number should be 110. These are very crude evaluations that do not take into account the investors risk profile or portfolio. My evaluation was that once I achieved my low risk goal, I didn't need to take risks with my capital. Hence my rather low current exposure to the share market. If inflation returns, then I'll change my portfolio composition.

90 is too high, try 80 if your lucky that is the average age lfe expectancy for men in NZ. Statistically very few make it to 90.

This has been very interesting reading for a change however. Your right about the horizon, the less time you have less of a truly "Active" life, the less your interesting in making money or risking what you have, certainly that is the case if you already know "You have made it to the finish line already" and can start enjoying it .Not the same for everyone however, enough is never enough for many people.

The issue with planning for the average is if/when you exceed the average. My planning assumes the most challenging 90% position, for both age and investment returns. Using the average means that half of the time you fall short for just one element such as the afore-mentioned age. For something where you have both investment return and age independent variables (2 element variation), assuming the average for both means that you will fall short more than half of the time. Full reality may be a bit lower or higher depending on the sensitivity of each of the factors, but the essential knowledge is that one shouldn't just assume the average when doing financial planning unless one accepts that one will become penniless for a material percentage of the total results. I chose to use a 90% probability for achieved age, and a 10% position on the bell curve for total return after inflation. I recognize that this is a conservative position. Maybe I should use 80% and 20%... I would seriously be worried if I used 50% and 50%, as I do not like how the combination of the two eventuates.

"enough is never enough for many people."... so true