2 - Saving for Retirement
Dave and Mandy
Dave and Mandy are in their mid 50s. Their children have just left home and they want to build their retirement savings. They are weighing their options:
- Reinvesting the rental income from their investment property (NZ$1,000 per month) into bank deposits or Smartshares
- Selling their investment property which would net them NZ$200,000 to invest in bank deposits or Smartshares.
They'd like to retire in about five years and they need the best performing investment option to ensure they can live comfortably in retirement. The table below outlines the potential performance of their investment options. It assumes a bank account pays 5.43% pa1 over five years with interest compounding, and SmartMIDZ posts a return based on the NZSX MidCap Gross Index return of 12.08% pa2.
| Rental income reinvested into either: |
Year 1 (NZ$) |
Year 2 (NZ$) |
Year 3 (NZ$) |
Year 4 (NZ$) |
Year 5 (NZ$) |
Bank deposits |
$12,350 |
$25,371 |
$39,099 |
$53,572 |
$68,831 |
 |
$12,772 |
$27,086 |
$43,129 |
$61,111 |
$81,265 |
Difference |
$422 |
$1,715 |
$4,030 |
$7,539 |
$12,434 |
| Sale of investment property with NZ$200,000 reinvested into either: |
Year 1 (NZ$) |
Year 2 (NZ$) |
Year 3 (NZ$) |
Year 4 (NZ$) |
Year 5 (NZ$) |
Bank deposits |
$210,860 |
$222,310 |
$234,381 |
$247,108 |
$260,526 |
|
$224,160 |
$251,239 |
$281,588 |
$315,604 |
$353,729 |
| Difference |
$13,300 |
$28,929 |
$47,207 |
$68,496 |
$93,203 |
1 Based on New Zealand Reserve Bank average six monthly term deposit rate over the last five years to 30 June 2004.
2 Based on actual performance of the NZSX MidCap Gross Index (which SmartMIDZ tracks) for the five years to 30 June 2004.
3 This example assumes that the full gross annual (i.e. before any applicable taxes) of the interest and the dividends received are reinvested. Any tax on these returns is ignored for the purposes of this example.
The benefit of reinvesting the rental income in SmartMIDZ instead of bank deposits is startling with NZ$12,434 separating the two investment choices. The difference is even more pronounced when the sale of the investment property is reinvested into SmartMIDZ – leaving Dave and Mandy a whole NZ$93,203 better off over just five years!
