For many New Zealanders, term deposits have been a popular (and quite profitable) method to grow savings and even provide a reliable source of income in retirement. However, as interest rates have steadily dropped over the last few years, those of us who rely on term deposits have become increasingly uncomfortable with the returns we are receiving. And how this might affect our financial goals, options, and lifestyle into the future.
Understandably, moving away from the security and familiarity of term deposits into different forms of investing has proven to be a real challenge for many risk-averse Kiwis. The fear of the unknown – not to mention the fear of losing our hard-earned savings – is often a more powerful influencer than that nagging feeling that we should be doing more with our money!
This case study is an example of a typical couple who came to us looking for options beyond term deposits. They had no previous investing experience and were certainly not looking to take risks with their savings. In fact, neither of them ever thought they would own an investment portfolio.*
CASE STUDY: Murray and Di
The Situation:
When Murray and Di came to meet us they had both recently retired from professional careers. They had always been careful with their money, and accumulated just over $1.3million in savings. All of this money was held in term deposits – across three different banks. Murray felt that was the safest option.
They both received NZ Super, and Murray had additional superannuation income from a work-based scheme he joined in his thirties. They also owned a rental property that brought in just under $20k a year.
While the couple clearly had a solid nest egg, and decent income streams, they had become increasingly concerned that they might be ‘going backwards’ with their savings. And that they couldn’t rely on the returns from term deposits to pay for the things they had planned.
Murray admitted he was a worrier when it came to money. He had been an ardent saver all of his life, and he wanted to know things were ‘moving in the right direction’.
“”To me, money is mostly about security. I’ve never wanted to be rich. And I’m definitely not a gambler! I just want to go to bed at night knowing I can pay my bills and do the things I want to do. It’s about freedom, I suppose?”
MURRAY (CLIENT)
Di was not as concerned about ‘running out’ as Murray was. But she had dreams of helping her family and contributing to community projects, and didn’t feel confident that they would have the spare money to do this.
“There are things I want to do. A legacy I want to leave. I worked hard all my life, and and I want to be able to give back.”
DI (CLIENT)
Neither Murray nor Di even wanted to be ‘investors’. The very thought made them both laugh out loud. It turned out they’d only agreed to meet with us because their friends (who had been clients for over a decade) had repeatedly suggested it. Di admitted their friends were probably just sick of hearing them argue about money.
Goals:
After getting to know Murray and Di’s situation, their adviser Paul Choi was able to help them better define their values around money, and the goals they wanted to achieve.
A high-level overview of their goals:
- Continue to build up their savings for at least the next five years
- Gain enough extra income from their savings to help family and contribute to community projects
- Always feel comfortable about their ability to spend and in control of their financial situation
- Stop worrying about money!
Starting With Understanding:
Paul spent much of the first meeting with Murray and Di going over how investing works, and their options. He believes taking this time for some fundamental ‘education’ plays a big part in helping clients to let go of any misunderstandings or preconceptions about investing. It’s also a chance to ask questions and get to know him.
In this case, Paul was able to help Murray and Di come to realise that investing doesn’t have to be what you see on Wolf of Wall Street. It’s not all silver suits and wild speculation.
“Everything is scary when you don’t understand it. We can all appreciate that. I love to start by explaining how the different parts of investing really work, the wide range of options available, and all the things we can do to help ensure you never have to take a big risk, or lose sleep.”
PAUL CHOI (FINANCIAL ADVISER)
Paul demonstrated to the couple that there are relatively low risk ways to invest via ‘fixed interest’ and ‘bonds’ that are far more familiar to people who are used to term deposits. These lower risk (but relatively lower return) options can then be combined with higher risk (but typically higher reward) investments in shares and property.
The mix of ‘growth assets’ vs ‘defensive assets’ in your portfolio should reflect to your appetite for risk and your timelines. One size doesn’t fit all.
Paul then helped Murray and Di understand that even though investing in shares is considered higher risk/reward, there are many ways to mitigate that risk. One of these is diversifying your portfolio across many countries, sectors, and companies – meaning you aren’t tethered to the fortunes of just a handful of shares.
This works in much the same way that owning rental properties in one city leaves you vulnerable to a localised market drop. Whereas owning different types of property in different places tends to balance things out – making for a smoother ride.
As you can see, there are many more great companies to choose from outside of New Zealand.
It’s worth remembering that over the long term, the global markets have consistently grown in value. By diversifying across many companies, sectors, and countries, you can experience more of an ‘average growth’ in the value of your portfolio as the market increases. It’s a smoother ride for those looking for reliable returns over quick profits.
Paul also took the couple through a Lifetime Cashflow Model. This allows you to enter real data on your situation, goals, and timelines and then visualise what this looks like into the future.
The great thing about this modelling is you are are able to try different scenarios and experiment with what might happen if you saved more, spent more, and retired earlier etc.
It also helps you understand what sort of returns you need to make on your money to reach the lifestyle goals you have in mind. In this case, Murray and Di were able to see how much they were missing out on because of the low interest they earned from their term deposits, and what that would likely mean for them later in life.
The Plan:
Paul drew up an investment plan with Murray and Di that captured what they were trying to achieve, while considering that they were new to investing, were reluctant to go ‘all in’ on a portfolio, and had term deposits maturing at different times.
The plan recommended how much money they could take as drawings from their portfolio without eroding their initial capital. It also covered other areas of their financial situation, such as asset protection and estate planning.
A high-level overview of the investment elements of the plan:
- Move $500,000 from a mature term deposit into a 40/60 investment portfolio
- This portfolio is projected to return several percentage points higher than their current term deposits
- Withdraw the recommended amount from the portfolio quarterly (or as they require it)
- Revisit moving over more money from term deposits as they mature over the next few years
Since Becoming Clients:
With their plan and their portfolio in place, Murray and Di are enjoying their retirement. They catch up with Paul for their regular progress meetings and to discuss any changes to their situation.
Since working with Cambridge Partners, Di says she is far more confident about how much she can contribute to the projects she is involved in. She says she loves how they don’t have to think about money as much as they used to.
“Looking back, I wonder what we were worried about! It seems so normal to have a ‘portfolio’ now. I’m even trying to convince Murray to sell the rental and just put that money into our portfolio. But mostly, I’m just happy that we both feel confident that we have enough to do the things we want now. And we don’t have to feel guilty or worried about how we spend our money. That’s the bit that has been life-changing for us.”
Di (CLIENT)
Murray says he feels much more in control after getting Paul’s advice. He enjoys knowing he has options and can ask for help and guidance whenever he needs it.
“Paul definitely helped us overcome that big leap into the unknown. But I also appreciated how we never felt pressured to do something we weren’t comfortable with. We haven’t put all our money into the portfolio yet, and maybe we never will. Whatever happens, I know I can call Paul up and have an honest conversation with him about our options. He’s someone I have really come to rely on. I tell people I have a ‘personal financial adviser‘ – which was definitely not something I ever thought I’d say!”
MURRAY (CLIENT)
It’s always heartening to hear the impact of good financial advice and planning can have on someone’s wider life and happiness. That’s part of the reason we chose Murray and Di’s story for this Beyond Term Deposits case study.
As financial advisers, we often start with a client by talking about money. But after we have done the initial work, we find many of our clients barely want to talk about money at all. That’s why they come to us in the first place.
“Don’t worry about that. We’re sorted“, they’ll say.
This information has been provided to you by Cambridge Partners Ltd, a fee-only independent financial advisory firm registered in New Zealand. Copies of our advisers’ disclosure statements are available on request and free of charge.
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*Note: we have changed some of the names and personal details in this case study for confidentiality reasons.