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Whether you come into a windfall or build up savings over time, investing money wisely is a key plank to securing your financial future.
It is essential to diversify your investments, conduct thorough research, and consult a financial adviser to tailor a strategy that aligns with your goals and risk tolerance. By making informed decisions and staying disciplined, you can have a robust investment portfolio that provides a reliable source of income.
But it can be challenging to work out where to invest your hard-earned money. In general, you usually have more focus on getting an income from your investments in your retirement or semi-retirement years.
It’s important to note that you can gain income from investments in different ways. For instance, some investments are more growth oriented, ie, their value grows over time, while others are more income oriented, ie, most of the return is paid out in the form of an income, some have a mixture of both.
Here are some of the best options for deriving an income as each has its unique features and risk-return profiles:
Annuities are financial products offered by insurance companies that provide a guaranteed income stream for a specified period or for life in exchange for a lump-sum investment. With an annuity, you can create a steady income stream to cover essential expenses during retirement or other periods of your life. Annuities offer peace of mind by ensuring a reliable source of income, regardless of market fluctuations.
Dividend-paying shares can provide a steady stream of income through regular dividend payments. Companies listed on the New Zealand Stock Exchange (NZX) often distribute a portion of their profits to shareholders in the form of dividends. By investing in well-established companies with a history of consistent dividend payments, you can enjoy capital appreciation and ongoing income, and you can sell units to add to your income.
Government bonds are debt securities issued by the government to raise funds for public spending. Investing in government bonds provides a secure and stable source of income through regular interest payments, known as coupons, and repayment of the principal amount at maturity. Government bonds are considered low-risk investments, making them suitable for conservative investors seeking income with capital preservation.
Home equity release is where you can access some of the value of your home in the form of a loan against your home where the interest is capitalised (increases over time) and is repaid when you sell your home and/or pass away. It leaves less for your beneficiaries but can be a good option if you are asset rich and cash poor. The older you are, the more you can borrow against your home.
Investment property can be a lucrative investment option for earning rental income. With New Zealand’s growing population and demand for housing, investing in rental properties can provide a reliable source of cashflow. However, it is essential to research the market thoroughly, understand the responsibilities of being a landlord and consider factors such as location, property management and maintenance costs. During time the value of property generally increases so, as well as providing an income, it is a hedge against inflation.
KiwiSaver is a retirement savings scheme that you, your employer and the government contribute to over time so that when you reach 65 you are able access it. You can do this by cashing up and moving the money into another investment, or you could sell a certain amount of the units each year to provide an income.
Managed funds, also known as mutual funds or unit trusts, pool money from multiple investors to invest in a diversified portfolio of assets such as shares, bonds and property. By investing in a managed fund, you can access professional investment management and benefit from diversification without the need for extensive knowledge or expertise. Many managed funds offer regular income distributions, making them suitable for income-oriented investors. Like individual shares, you can sell units to add to your income.
Peer-to-peer lending platforms connect borrowers with individual investors willing to lend money in exchange for interest payments. You can earn income by investing in loans to individuals or small businesses. While peer-to-peer lending offers the potential for attractive returns, it is essential to assess the risks carefully and diversify your investments across multiple loans to mitigate default risk. Some pay a regular income, others the income is paid out at the end.
Term deposits are perceived as low-risk investments. You deposit a fixed amount of money for a specific term, typically ranging from a few months to several years, and in return, you receive regular interest payments. They offer security and predictability, making them an attractive option for generating income. However, they have risk from the perspective that the underlying capital does not grow over time, as it’s all paid out as income, and that value gets eroded over time with inflation. The younger you are and the lower the value of your investment amount the more of a risk this is. Simply – what $100,000 buys you now may only buy $60-70,000 in 20 years depending on the rate of inflation.
Lisa Dudson is an investor, entrepreneur and author of 8 bestselling personal finance and property investment books. She has been a media commentator on financial issues for more than 20 years and is known for pragmatic, meaningful and easy-to-understand financial advice. She is a director and shareholder of Saturn Advice and National Capital and provides financial and property advice through her consulting business www.acumen.co.nz
