Those among us with savings in the bank who are relying on the interest on those deposits to supplement incomes in retirement have some hard choices before them in the next few months.
With the Reserve Bank yesterday cutting its official cash rate 0.5% to 2.5%, deposit rates are sure to follow the lead of floating home-lending rates, which tumbled by the same amount. Some banks had previously announced cuts in fixed lending rates.
A trimming of deposit rates is only a matter in time.
Already, depositors could be losing money on their bank investments.
If deposit rates are 5% and inflation is 4%, there appears as though there is a margin of income available. However, if you take tax of the deposit rate at say 33%, then the deposit rate becomes 3.5% - below inflation - and depositors are losing money as their costs increase further.
Inflation is forecast to go to 5% this year because of a series of unexpected events. While the Reserve Bank "looks through" those types of events when it forecasts inflation, that gives no joy to those relying on interest on their deposits to supplement their incomes during tough times.
The obvious answer is to turn to the sharemarket, with some New Zealand-listed companies providing high yields on investments.
Auckland International Airport and Contact Energy provide gross yields of 6%, retailer The Warehouse Group has a yield of around 10% and energy company Vector provides a yield of about 8.4%.
Property stocks, which are normally in PIEs (portfolio investment entities), have a lower rate of tax and provide investors with a gross yield of around 10%.
Many investors were hurt badly in the past two years when finance companies went into receivership and millions, if not billions, of dollars were wiped from personal balance sheets.
However, those same investors should not confuse finance companies with NZX-listed companies. Sharemarkets have been volatile in the past but, for months now, ongoing growth has been seen in markets around the world.
Investors clinging to their term deposits may have to once again take a look at the sharemarket if they want some return on their money.
