Agony Aunt: 1.5 million reasons to return home

Dear Janine

We are two New Zealand citizens who will soon repatriate home to retire.

Besides our house and cars, we have sufficient funds for home renovations, house furnishings and a couple of overseas trips. On top of that there is $1.5 million to invest. This would generate income plus we'd have superannuation.

We are risk averse and hate paying fees for investment "advice" (this often proves worthless in the fullness of time).

We are aware that diversification of our investments would be ideal. However, the simple solution is to put $500,000 in a three-, four- and five-year term deposit with one of the major banks.  Do you have any other suggestions for our funds? 

ANSWER:

Welcome home to you both.

It's always great when two financially well-padded retirees return to plump the New Zealand economy.

Let's churn out some rough calculations.

With a bit of phoning around you should be able to achieve better deposit rates than those published publicly. Three lumps of $500,000 talks.

You might achieve 4.7 per cent for the three-year, 4.8 per cent for the four-year and 5 per cent for the five-year from a top rated New Zealand bank (not the second tier unheard-of variety).

That would give you an annual income of about $72,000.

If you split the interest between the two of you (at a tax rate of 17.5 per cent) there would be close to $60,000 net income.

Superannuation on an S tax code is roughly $28,000 a year after tax. Anyone could live off $88,000.

It's got a handsome feel to it, but the value isn't the point.

Deposits are not a risk-free decision. Your income will sway around as interest rates change at maturity and you have no inflation protection (in the form of capital growth).

In 20 years the purchasing power of your income will be significantly less.

Deposits have low short-term risk, but to my mind, high future risks.

Shares pose the opposite issues. I struggle to choose one over the other due to their extremes.  

A diversified portfolio tends to appeal to me personally as it puts a bob each way.

The idea is to control near-term volatility while protecting long-term purchasing power.  

No one likes paying for advice.

I'm not a fan of paying for advice either.  But I do.

That might surprise you. Surely someone with my background would do it all herself and smugly save some money.

Nice thought, but the only thing I'm smart enough to know is I'd be the mechanic with the worst car in five years time.

I want my own professional service and the ability to stand back and question.

I owe it to my husband to create an element of independence and I owe it to myself to take away the pressure in order to make better decisions.

We all grizzle about fees, but it costs money for all the analytical work, annual reviews, reporting, and the administration of paying out a regular income from a multitude of sources.  

A whole spectrum of investments are used to create a diversified portfolio and each adviser will do things a bit differently.

Very broadly, you will end up with cash, bonds, local and international equities and probably some property funds.

Models will work out a level of income that can be taken from interest, dividends and stripping out capital growth.

Then there is the important question of using your original capital versus inheritances for children.

Paralysis of the self-managed investor

A pitfall of the self-managed investor is extreme caution.

One partner usually takes the lead in financial decisions. The level of responsibility for portfolio losses feels high, so there is no desire to make any real decisions.

One will tell the other it's wise to be risk averse. Who would ever disagree with such sensible sentiment?

Neither recalls who said it first and it's quickly cemented as a strong joint decision. This eliminates pressure and spits out a zero-fee reward. 

Risky business  

I can tell from your email that you've been a business owner overseas.

By the look of the business you were running, you'll be familiar with market cycles, varying income and risk.

You are probably comfortable with these things, because you are intimately involved day to day.

Familiarity shrinks the perception of risk. But it doesn't change the quantum of it one little bit.

Due to your background, I'm struggling to align this with your 'risk averse' label.

I suspect that your perception of risk in the equity, bond and property markets might be suffering from the reverse issue – a lack of familiarity.

It's a perfectly normal and natural reaction to elevate the perceived danger. I can't name any specific investments for you to look at as only an authorised financial adviser can do this.

A diversified portfolio will contain hundreds. You need to go through the advice process and look at the different outcomes a portfolio could produce.

It's ok to revert back to deposits if it's out of your comfort zone, but do so from a fully informed stance.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.