Retirees punished by low interest rates
Pensioners reliant on investment income are feeling the squeeze as record-low interest rates stretch into their third year.
The Reserve Bank kept the Official Cash Rate on hold at 2.5 per cent this morning, where it has been unchanged since March 2011.
The central bank expects to keep the OCR on ice until the end of the year, and economists aren't picking any hike until January or March 2014.
More than four years have passed since official rates rose above 3 per cent.
While the low interest rate environment has been fantastic for people with mortgages and other debt, it is punishing investors with a low tolerance for risk.
Retirees in particular often rely on fixed-interest income from bonds and bank deposits to supplement their superannuation.
"I've got a lot of clients in their 80s and 90s who are living longer and spending more," New Zealand Financial Planning's Greg Moyle said.
"They're naturally conservative, so that means you're going to have a bigger weighting into interest-bearing investments."
Moyle said many people were treading water in short-term investments for fear of being locked into anything when interest rates eventually rose.
"It not only affects people reliant on interest for their income, it also affects a lot of trusts, like charitable trusts and community trusts."
He said getting proper advice and moving into a more balanced portfolio could help investors ride out the tight times.
Stuart & Carlyon adviser Susanna Stuart said the low interest rate environment was "very challenging".
"Everyone's been saying interest rates are going to go up, but it's been like that for how many years?" she said.
Before the global financial crisis, Stuart had locked in long-term bonds that have returned a healthy 7 per cent to 7.5 per cent each year.
"But they're all coming due soon," she said.
"It's quite a huge difference from getting that lovely income stream and riding out the global financial crisis, to now hitting a bump in terms of trying to find cashflow."
Now her strategy was to make sure clients had a mixture of short, medium and long-term investments.
"We've had to convince a lot of our clients that normally wouldn't have much in shares to start looking at that," she said.
She also advocated taking a "holistic" approach by getting people to cut back on spending and adjust their lifestyles until investment returns perked up.
The Reserve Bank, which strongly influences all interest rates through adjustments to the OCR, is caught between a rock and a hard place.
House prices are rising and inflation is below the target 1 per cent to 3 per cent band, but a hike in interest rates would further inflate the overvalued New Zealand dollar.
The bank's projection for the next couple of years assumes both house prices and the dollar "moderate", cooling down from early next year.
It said in one possible scenario if house prices continued to rise, interest rates would be hiked sooner and at a faster rate than projected.
That would simultaneously put a damper on the housing market and improve investment returns, but would also cause more foreign money to flood into the country.