Watering money

The four best investments for under 65’s

There are some fantastic investments available which can form a key part of achieving the financial milestones in your life. Below is a list of the four best investments for under-65’s, some of which offer a low risk and guaranteed rate of return. This means they offer a great platform for your future financial wealth, security, and independence. If you’re nearing or over 65, the last one will likely apply to you too.

1. Repay any high-interest debt.

This sort of debt is the kind found on credit cards, hire purchases, personal loans, vehicle lending, personal loans, peer to peer lending (often called P2P), or typically any lending which is for consumer goods – not something like an investment property which is expected to increase in value over the long-term. These sorts of debts nearly always have high interest rates, outrageous administrative fees, and, if you have them, are probably a big drag on your future or current cashflow. Quite simply, it’s nearly impossible to move forward if you’re paying large amounts of interest each month, so these so-called “bad debts” need to be immediately crushed. Common rates for these sorts of bad debts are:

  • 300% - 400% pay-day loan
  • 17% - 27% hire purchase
  • 15% - 25% store cards
  • 13% - 22% credit card
  • 12% - 28% personal loan
  • 10% - 22% P2P lending

Debt repayment is still an investment. World-renowned sources define an investment as “any mechanism used for generating future income”. By repaying debt, you’ll improve your regular cashflow, and therefore generate net income (this is your income after all expenses are deducted, such as debt repayments) which can be put to better use elsewhere. Repaying debt also essentially achieves a low risk rate of return (the rate of return is a performance measure used to evaluate the gain of an investment, usually in terms of a percentage per year based on the investments value), reduces your liabilities and the risks you’re exposed to, and increases your overall net worth.

Student loans are usually an exception: New Zealand student loans are interest-free so long as you stay in the country. Because of their interest-free nature, the steady rate of inflation means that in real terms the amount you owe is steadily reducing relative to the price of other goods and services. So, unless you plan to leave the country there is usually no reason to pay a student loan off at anything other than the normal rate.

2. Repay your home mortgage.

For readers who are homeowners, reducing your mortgage is a sure-fire way to get ahead and will reduce what’s usually the biggest payment on your budget. The return offered by paying off your mortgage is tax-free and a guaranteed return. (If you don’t have your own home yet, saving for and getting your first home is likely to be your best bet.)

Interest rates charged on mortgages are usually nowhere near as high as the high-interest debts listed earlier such as credit cards and hire purchases. Mortgage rates for the last few years in New Zealand have ranged between 4% and 6% per year. Depending on your tax rate, for an investment to outperform this return it would have to consistently generate about 8% per year before taxation is applied.

Existing homeowners: Learn more about how you could repay your home loan years faster.

First-home buyers: Learn more about buying your first home.

The mortgage on an investment property is usually an exception: The low rental yield (income an investment property produces relative to its value) on nearly all New Zealand residential properties means that property investment is largely based on capital gains. Along with tax advantages, this means that it’s not usually required to repay mortgage debt on an investment property beyond the amount necessary to get the property to an approximate breakeven level – when the rent covers all expenses. If you’d like to discuss this in more detail, please let us know.

3. Join a good KiwiSaver Scheme and obtain the minimum benefits.

KiwiSaver is a voluntary, work-based savings scheme to help New Zealanders save for retirement. It’s been designed to be hassle-free, so it’s easy to maintain a regular pattern of savings.

One of the main benefits of KiwiSaver is the member tax credit of $521 per year, which is paid into your KiwiSaver account so long as you contribute more than $1,042 and are over 18. If you’re employed and you’re a KiwiSaver member contributing at least 3% of your salary, your employer will also contribute 3% of your income. Therefore, if you earn $40,000 or more and are making 3% contributions, you should qualify for the annual member tax credit.

However, a key drawback of KiwiSaver is that strict withdrawal criteria apply, which means that in most cases you can’t withdraw funds until retirement or you’re buying a first home. This is where other investments are far more likely to meet your needs and offer you the flexibility that KiwiSaver cannot – for example, if your circumstances change or you’d like the option to retire before NZ Superannuation age. Read on to learn about more versatile investments.

4. Develop a large portfolio of investments to achieve your milestones in life.

Once the three investments above are mastered, it’s time to start taking serious action toward growing the funds you need to achieve your lifetime milestones – which likely includes growing your retirement nest egg for a great retirement.

The best investment at this point varies greatly from person to person, though, as always, ensuring that your overall investment portfolio is as diversified as possible is crucial to ensure that risks are minimised and that your overall financial position is as robust as possible. The significant array of options available to you at this point have been explored in a lot more detail right here.

The bottom line

For most under 65’s in New Zealand, the best three investments are paying off any high interest debts, repaying your home mortgage, and joining a good KiwiSaver Scheme.

After that, the best investment varies greatly depending on your individual circumstances. To learn more about what investments might suit you, read more here.

If you have any other questions, please do not hesitate to contact us: