What Covid means for retirement

This pandemic has got a lot of people thinking about their retirement plans. From a financial planning perspective, 3 themes come through:

1. Covid means recession
2. Covid means low interest rates and distorted assets valuations
3. Covid means likely adjustments for NZ Super

Recessionary expectations have people worried about job security. It has already been felt by relatively high-income earning professionals as well as lower skilled workers. A dramatic drop or cessation of wages will be common. Those displaced, may be forced to redeploy into lower paying or less secure jobs. Some have heavily geared into property investments (such as Queenstown) where they saw opportunities with Air B&B rents paying off mortgages and creating wealth for little effort or ability.

The real estate market is patchy. Regions hit by the drop in tourism will likely see falls in property values and big drops in rental income. With the prospect of redundancy and redeployment, this heavily concentrated big-bet retirement wealth strategy is becoming a dangerous choice. Big cities have their equal but different risks as well.

Lower interest rates have also made term deposits less attractive. Many will be tempted to chase higher advertised returns from non-banks that infer little extra risk. Rates are now very low with no upward pressure in sight, and there is the real possibility that you will pay the bank for the privilege of depositing ones money in the future. This is called 'Negative Interest Rates'. Don't laugh because it has happened in Europe.

Recently the European Central Bank issued a 30-year bond with an interest rate of less than 1%. It was oversubscribed. The fact is investors are not going to earn enough from interest bearing investments to fund their retirement.

Retirees face 3 choices as a result:

1. spend interest and capital (savings) and hope that their money doesn?t run out before they run out of life or,
2. invest in higher yielding but riskier assets
3. reduce their spending significantly

Pushing out the age of retirement and means-testing as to who receives a pension is surely going to be a realistic probability. With necessary additional debt the Government is taking on to prop up jobs and the economy, someone is going to have to pay for it.

That someone is mainly going to be those who have not yet retired or even not old enough to work yet. The younger you are the more likely you will end up footing the bill in higher taxes and deferred or reduced entitlements.

It may come to bear that those who are already retired are the lucky ones. Politicians have been reticent to tamper with this sacred cow. Ardern, and Key before her, vowed not to touch NZ superannuation entitlements while at the helm; but the issue of inter-generational equity will surely bring it back for debate.

All this can be depressing. Recent surveys by KiwiSaver providers have pointed strongly to the real financial benefit of working with a professional financial adviser. Rash and ill-considered decisions, driven by fear, family opinion and media hype, have cost KiwiSaver investors a lot of money since the Covid-19 pandemic struck.

Good financial advisers have been proven to make a huge difference with money. They help you make the important play-offs between the now and the future, risk & return, and how to make good decisions. They help you stay the course during periods of hysteria and fear. The old adage of 'good things take time', together with persistence and commitment to see things through, serve patient investors well.