Retired investors typically look for security in their investments ahead of return. Superannuation payments barely cover the cost of day-to-day living and saving in retirement is impossible without a frugal lifestyle.
This means any loss of capital from failed investments cannot be recouped from income.
However, some retired investors fail to realise
that loss of capital doesn't arise only from failed investments.
An investor with $100,000 in bank deposits who uses the interest to supplement income stands to lose over 20 per cent of the capital over the next 10 years just by leaving it in the bank.
Let me explain why. A "basket of goods" that costs $100 in December 2000 would today cost $131.
If we project that same average rate of inflation forward, then $100,000 in the bank today will buy the equivalent of $77,000 of goods 10 years hence.
That is a loss of $23,000 over the decade. Not only that, but the income from the investment will fall in value. If, for example, interest rates are 6 per cent on average over the next 10 years then the income from $100,000 would be $5370 a year after tax of 10.5 per cent.
However, after 10 years that income will buy only $4130 worth of goods in today's terms.
A retired investor who invests for income and uses all that income every year will therefore suffer a significant loss of both capital and income over the long term. Given that many people spend 20 or even 30 years in retirement, the potential loss of capital and income is huge.
Investing a small part of your retirement nest egg in a diversified portfolio of growth assets will help prevent losses from inflation and tax.
Liz Koh's disclosure statement can be obtained free of charge by calling 0800 273 847.
www.moneymax.co.nz
