Negative real interest rates sabotage savers

Faced with massive wealth erosion for savers, New Zealand’s retirement commissioner has no advice other than go back to work and see a good financial adviser.

While good news for some, crashing interest rates combined with high inflation is creating negative returns for conscientious savers, hammering the sole income source (other than the government pension) of many of New Zealand’s 495,000 people aged over 65.

As NBR columnist Michael Coote points out, when interest rates are lower than inflation (an OCR of 5% versus inflation of 5.1%) it’s a calamity, and it’s economically unsustainable.

For someone who has worked hard, prudently scrimped and saved their whole life for retirement, paid off their house, and now lives solely on the interest off their savings ( and the pension), the difference in income between this year and last will be substantial – a loss of up to 50%.

A lump sum of $250,000 sounds like a reasonably large amount of money. But that figure deposited in a bank, minus taxes but plus a pension, translated into an income (pdf table) of just $12,501 last year – much less than half of the median wage – and which this year will be downgraded by $6298 to become $6203 of income to live off for the entire year, or $119 a week.

Even if you have $1 million in the bank, living off that interest and a pension would have given you $50,078 last year – but you’ll be downsized by $18,825 to an income of $31,253 this year. Not exactly lifestyles of the rich and famous at $601 a week. If you think that’s rough, try doing it next year when interest rates (and inflation) dive to 3.5% and you’ve got $424.63 a week.

Retirement commissioner Diane Crossan points out that more than half of New Zealanders over 65 live solely on the pension, and argues that anyone who’s got anything over that is definitely not living in poverty. But then, “Poverty is never defined in New Zealand. The politicians in New Zealand have worked very hard to never use the word poverty, and so they talk about hardship. I’ve avoided it too because it doesn’t work in New Zealand very well.”

“Don’t panic” is the main message Ms Crossan emphasises, along with considering postponing retirement to work a bit longer – or go back to work if you have retired. Other suggestions for dealing with massive wealth erosion by Ms Crossan include continuing to work for one day a week, teaching piano, renting a room, or sharing expenses with friends, neighbours or family.

“I mean it’s not a joyous story but people do find ways, and what we want is for people to talk about it and not just blunder into it, to understand what’s going on, and talk to their financial adviser about what’s best for them.”

Grey Power president Les Howard says, “It’s definitely going to have an effect – on those who have savings left.

“The collapse of the finance companies didn’t help a hell of a lot, because people had money invested there where they not only lost their supplementary income, they lost their capital as well. So that didn’t help a lot, but for those who’ve got any left, the low interest rates is going to make it a bit difficult isn’t it? It’s no good, but what the hell can we do about it?”

Mr Howard took his own savings out of finance companies some time ago and put them into a bank but never relied on that for income because both he and his wife have private, independent superannuation as well. They use their savings for one-off big ticket expenses like fixing the car or a holiday.

Grey Power superannuation and taxation chairman Ian Anderson, however, is in a different situation, because he is supplementing his superannuation with income from his savings, and says there are a huge number of superannuitants like him.

He draws attention to the fact that there is a myth in the general population that superannuation is at 66% of the average wage, “which of course is nonsense” as that figure is for a couple. Given the attrition rate from divorce and death, couples are not in the majority of retirees.

“There’s nothing we can do about it really. It’s just creating awareness. The problem that Grey Power has is every time we try to bring a focus on to the desperate situation that so many of our members are living in, we get tagged as ‘greedy oldies’. So a lot of baby boomers and the youngsters out there think ‘god, I could live on 60% of the average income, what are they bleating about’. So that’s why we have to be careful about how we go about creating an awareness of our problems.”

Negative interest is going to have a huge impact on our membership, and seniors in general, says Mr Anderson, because so many have lost their nest egg just in the last few months. “And they have no way of making up that capital again.

“We have fielded many, many calls, and we’ve asked people if they’d go public and be quoted as we’re constantly contacted by newspapers and so on, but we belong to a generation of very proud people, and nobody really wants to come off as a whiner.”

But the fact remains that savings, like most investment options for the past 10 years be it property, finance companies, or the sharemarket, have now turned into financial culdesacs – leaving seniors and retirees having jumped one more time from the proverbial frying pan, into the fire.

*Correction: updated table here.