We explore why owning millions of dollars in property doesn't necessarily mean you'll have enough income to enjoy your retirement. From investment properties and term deposits to shares and bonds, we break down how to build a retirement fund that supports the lifestyle you actually want to live.
Why Property Alone Isn't Enough to Fund Your Retirement
For decades, property has been one of New Zealand’s most popular ways to build wealth. But there’s a significant difference between accumulating wealth and having enough income to fund your retirement.
As Michael explains, it’s entirely possible to own an impressive property portfolio and still struggle with cash flow. You might be worth millions on paper, but that doesn’t necessarily mean you have enough accessible money to cover your everyday expenses.
This is a challenge our team regularly encounters when working with clients approaching or already in retirement. After spending decades building a property portfolio, many investors are understandably reluctant to sell the assets that helped create their wealth.
However, James argues that the investment strategy that worked throughout your working life isn’t necessarily the strategy that will serve you best in retirement.
Property and leverage can be effective tools for growing wealth over time, but retirement requires a different approach. Rather than focusing solely on capital growth, investors need to consider how their assets can generate consistent income without forcing them to sell investments at the wrong time.
This doesn’t mean property has no place in a retirement portfolio. As James explains, whether residential investment property remains appropriate depends on your overall wealth and financial circumstances.
The important distinction is understanding that building wealth and funding your retirement are two very different financial objectives.
How to Build a Retirement Fund That Generates Income
When it comes to structuring a retirement fund, James emphasises the importance of using the right investments at the right stage of life.
While New Zealand Superannuation provides a foundation of retirement income, many retirees will also need to generate additional income from the assets they’ve accumulated throughout their working lives.
The challenge is balancing three competing priorities: generating sufficient returns, protecting your capital and ensuring you can access money when you need it.
Investing too conservatively can mean your savings gradually lose purchasing power. On the other hand, holding too much money in higher-risk investments could expose you to significant market downturns just when you need to start withdrawing funds.
For example, James explains that a growth or aggressive investment portfolio could experience a 40% decline in a single year. For someone approaching retirement, that could have a significant impact on their ability to fund their lifestyle.
That’s why he generally favours a more balanced investment approach for clients nearing retirement, with an example allocation of approximately 50% in shares and property and 50% in cash and bonds.
This combination allows investors to maintain exposure to assets with long-term growth potential while holding more stable investments that can be used to fund withdrawals during periods of market volatility.
Rather than selling shares during a market downturn, retirees can draw income from the defensive portion of their portfolio and give their growth investments time to recover.
Of course, there is no universal retirement strategy. Someone planning to retire at 50 will have very different requirements from someone retiring at 65 or 70.
James suggests that investors may need to start reconsidering their overall risk exposure around five to seven years before retirement, although the appropriate timing ultimately depends on their individual financial circumstances.
Are Term Deposits a Good Retirement Investment?
Term deposits are often viewed as a safe and straightforward way to generate retirement income. They provide certainty around the interest rate you’ll receive and remove the day-to-day volatility associated with investing in shares.
However, James argues that relying too heavily on term deposits can create another significant risk: inflation.
Consider an example where a term deposit offers a 3% annual return. After tax, that return might fall to approximately 2%. If inflation is running at 2.5% to 3%, the purchasing power of your money is gradually declining.
Over a retirement that could last 25 or 30 years, this erosion can have a substantial impact on the lifestyle your savings can support.
Term deposits also present liquidity challenges. Money is generally locked away for an agreed period, and accessing it early may involve break fees.
That doesn’t make them entirely unsuitable. James acknowledges that term deposits can be appropriate for short-term financial goals or investors who simply cannot tolerate fluctuations in the value of their investments.
However, the trade-off is important to understand. Avoiding market volatility doesn’t mean avoiding financial risk altogether.
By keeping all your retirement savings in term deposits, you may be sacrificing the investment returns needed to maintain your purchasing power and fund your lifestyle over the long term.
Finding a Balance Between Stability and Flexibility
For retirees looking beyond term deposits, bonds and cash funds offer alternative ways to generate income while maintaining a more defensive investment strategy.
Bonds
A bond is essentially a loan made to a government, council or company. In exchange, the issuer pays interest, known as a coupon, and generally repays the original amount when the bond matures, provided it meets its obligations.
Bonds are typically considered lower risk than shares and can provide an income stream while helping offset some of the volatility within a diversified investment portfolio.
However, they aren’t risk-free.
James highlights how bonds can lose value when interest rates rise. If an investor owns a bond paying 4% and newer investments begin offering substantially higher returns, that existing bond becomes less attractive to other investors.
Despite these risks, bonds can play an important role in providing stability and income throughout retirement.
Cash funds
Cash funds offer another option for investors who want relatively stable returns without locking their money away in a traditional term deposit.
As James explains, these funds generally hold a combination of bank deposits and other defensive investments, potentially including government bonds.
Their key advantage is liquidity. Unlike a fixed-term deposit, investors can generally access their money without waiting for a maturity date.
Returns may be similar to, or slightly lower than, term deposits, depending on the fund.
For retirees who need regular access to their savings, this flexibility can be particularly valuable.
James also emphasises the importance of understanding what a cash fund actually invests in, rather than assuming all funds carry the same level of risk.
Should Shares Still Be Part of Your Retirement Portfolio?
While defensive investments help provide stability, shares can continue to play an important role in generating long-term returns throughout retirement.
The challenge is deciding how much exposure to maintain and which investment approach best suits your circumstances.
James outlines three common ways to invest in the share market.
Direct share investing
Buying individual companies gives investors control over their portfolios, but it also requires considerable research, time and expertise.
James points to the difficulty even professional fund managers face in consistently outperforming the market. In the discussion, he notes that approximately 20% of active managers outperform their benchmark over a ten-year period.
For everyday investors balancing careers, families and other commitments, attempting to consistently identify winning companies can be particularly challenging.
Low-cost index funds
Index funds provide a relatively straightforward way to invest across a collection of companies without attempting to select individual winners.
They generally offer lower fees and can be attractive for investors who prefer to manage their own portfolios.
However, James cautions against assuming that investing in a single popular index automatically provides sufficient diversification.
For example, concentrating your investments in the S&P 500 or a fund heavily exposed to US technology companies may leave you more dependent on one market or sector than you realise.
The goal should be to build a diversified portfolio rather than simply selecting whichever fund has delivered the strongest recent performance.
Actively managed funds
Actively managed funds employ professional investment managers who attempt to outperform a particular market or benchmark.
While these funds can deliver strong returns, they typically charge higher fees, and consistent outperformance can be difficult to achieve over the long term.
James discusses how even successful investment managers can face challenges as their funds grow, particularly when their investment opportunities become more limited.
Ultimately, the most suitable approach depends on your financial goals, appetite for risk and willingness to manage your own investments.
Why a Financial Plan Matters More Than Picking the Best Investment
With so many retirement investment options available, it’s easy to become focused on identifying the product offering the highest return.
However, James argues that retirement planning should begin with a much more important question: what kind of life do you actually want to live?
A financial plan connects your investment decisions to your personal goals, rather than treating each investment as an isolated decision.
This means considering when you want to retire, how much income you’ll need, how comfortable you are with investment volatility and how your assets should be structured to support those objectives.
James also highlights the importance of working with an independent financial adviser who can consider investments across different providers rather than being restricted to a particular product range.
Diversification is central to this approach. Rather than relying entirely on property, shares, bonds or term deposits, a well-considered retirement strategy brings together different investments that serve different purposes.
Some assets provide income and stability, while others offer opportunities for long-term growth.
The objective isn’t necessarily to achieve the highest possible investment return. It’s to build a portfolio that allows you to enjoy retirement without taking unnecessary risks or worrying about where your next withdrawal will come from.
After all, accumulating wealth is only one part of the equation. Knowing how to use that wealth effectively is what makes the difference.
Key Takeaways
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Property wealth doesn’t always translate into retirement income. A valuable property portfolio may leave you asset-rich but without enough accessible cash to support your lifestyle.
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Your investment strategy should evolve as retirement approaches. Assets that helped you accumulate wealth may not be the most appropriate investments when you begin drawing an income.
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Term deposits offer stability but come with inflation risk. Relying too heavily on cash-based investments can gradually reduce your purchasing power.
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Bonds and cash funds can provide defensive income options. These investments can help manage volatility and provide access to funds when needed.
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Shares can still play a role in retirement. Maintaining diversified exposure to growth investments may help support your income requirements over the long term.
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Diversification is essential. Combining growth and defensive assets can reduce reliance on any single investment and provide greater flexibility during market downturns.
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A financial plan should guide your investment decisions. The right retirement strategy depends on your goals, time frame, financial position and tolerance for risk.
Next Steps
Our Lighthouse Financial wealth advisers can help you build a personalised financial plan, structure your investments and create an income strategy aligned with the lifestyle you want to enjoy.
If you’d like to watch more, check out this episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
