The Reserve Bank of New Zealand (RBNZ) aims to maintain inflation rates of between 1% to 3%. This is important for our economy as it ensures that the cost of living remains relatively affordable.
However, rising inflation can result in a decrease in purchasing power of each dollar by 1% to 3% depending on the effectiveness of the RBNZ’s monetary policy in that year. This is why it is important to invest your money correctly especially your retirement savings, so they grow over and above the inflation rate (<3%), therefore protecting your moneys purchasing power.
An example of your purchasing power decreasing is a $100,000 term deposit with an interest rate of 3% per annum, your return on this term deposit is $3000. Let’s say that you were taxed at 10.5%, this would mean your net profit is $2685. If inflation is at 3%, then the real value of your money or the purchasing power has decreased because inflation has outperformed your investment. This is why it is important to ensure that your money is making returns above and beyond the inflation rate, while factoring for your tax implications.
Your willingness to take on risks (your risk appetite) with your investment’s change over the course of your life and may fluctuate depending on your stage in life and how many years before you retire. This is called your ‘risk profile’, and these factors will determine which Kiwisaver fund best suits your needs.
Depending on your risk profile, the composition of your Kiwisaver fund will include either a larger portion of shares (growth fund) or a smaller portion of shares (conservative fund). Investing your money in growth assets like managed funds can provide long term inflation protection.
The average return of a growth fund (after fees and before tax) was 11.2%pa (1/10/2011-30/9/2021). This has grown faster than the rate of inflation over the last 10 years. The more risk that you take, the higher the potential return, however, the greater the chance of a loss.
Inflation is simply “another cost” that can eat away at your retirement, by reviewing your strategy regularly, you are giving yourself the best possible chance to stay ahead of the curve and achieve the retirement you deserve – if you start to go off course making small changes will ensure you stay on target.
Stephen France is the Kiwisaver Specialist at Apex Advice. He has a wealth of knowledge in Kiwisaver funds and would be happy to have a chat with you about whether a growth fund is best for you.