A.You're not just worried about a rainy day, you're worried about a continual downpour!
Your plan is not bad. It's certainly better than putting the lot on one-month deposit and rolling it over. You will normally earn more interest tying up the money for a year.
But you're being overly cautious, and will end up worse off because of it.
While interest on term deposits is currently more than inflation, it's not that much more. And interest rates could well drop. The crux of the matter is this: You might need up to $10,000 extra occasionally, but certainly not most months.
I suggest, therefore, that you put $10,000 in a one-month term deposit that rolls over and can be called upon for emergency use.
Or - if it would make you sleep better - put two lots of $10,000 in two-month deposits that mature on alternate months.
The rest could go into high-quality corporate bonds or debentures that will pay higher interest than term deposits.
And over the years, another one or two per cent on $100,000 makes a difference.
At 3 per cent after tax, $100,000 grows to $156,000 in 15 years. At 4 per cent, it grows to $180,000, and at 5 per cent, it grows to $208,000. As long as you stick with quality bonds or debentures, you would be extraordinarily unlucky to lose money.
To guard against that remote possibility, spread your funds over several different instruments. A stockbroker can advise you on what's on the market.
To keep your money fairly readily available - just in case of that continual downpour - you might select some bonds or debentures with just a year or two to run, while others might have five years to run.
You could also time maturities to match any expected purchases.
You can, if needs be, always sell bonds or debentures on the market at any time. But it's best not to plan on that.
If you sell before maturity and market interest rates have risen since you bought, you will get less than you paid. But if you hold to maturity, you'll get the full amount.
As far as the annuity idea goes, would it matter if you died early? You won't be around to care! But an annuity wouldn't really suit you, anyway. If you get one, you give an insurance company a lump sum, and they give you back regular payments, usually until you die. You don't need regular payments.
Also, annuities don't seem to be a great deal for newly retired people. They make more sense for older people. See next Q&A.
Question: Up to now my interest in investing has been largely academic. My wife and I, now in our late seventies, have never had spare cash to invest nor, indeed, accumulated cash in the bank.
Any spare money we have had has gone into our home and garden. Long term this has paid off handsomely because we have now sold our property to move into a retirement home and will be left with a reasonable surplus of about $l5,000 to $20,000.
All or part of this I would like to invest to secure a regular, if modest, return to boost our other income.
I do receive two small company pensions which pay for most of our fixed outgoings (power, insurance, etc.). These supplement our New Zealand Super. I have looked at shares and unit trusts, (which you have recommended on a long-term basis), but I think it is too late in life for us to invest in these.
Until recently I had a Tower Funds account which produced enough to buy a good second-hand car. But it took me 10 years to save for this. Would you kindly recommend an interest-earning fixed deposit(s), (apart from a bank)?
Incidentally, in over 50 years of marriage I have maintained our five houses in good decorative order, and we have invested in our garden in terms of time, money and love. Each time buyers have been attracted to our garden, and it has made it easier to sell the house.
The pensions I mentioned were deferred and, over the years, have accrued substantially in value. Without them we would be having a hard time.
If I had cashed them in at the time I left the companies I would have nothing to show for it now. I would value any help you can give us.
Answer: One thing I love about this column is the give and take. You're asking for advice, but also passing on wisdom.
Your points about maintaining your gardens and, in particular, not cashing in your pensions should be helpful to readers.
What to do with your $15,000 to $20,000?
You're quite right that shares or a share fund wouldn't be a good choice, given that you want to spend the money over the next few years. There's too big a chance they would lose value over the short term.
A fixed interest investment is another option. I'm not in the business of recommending a particular one, but my advice to today's first correspondent should help you.
In your circumstances, though, an annuity, which is like a pension, would probably serve you better.
The return you get is partly interest, partly principal. So it's more than if you invested in a safe bond or similar.
And payments will continue, even if you live to 120. If you do join the centenarians, the insurance company will pay out more than it got from you. You're subsidised by other annuity buyers who didn't live very long after their purchase.
I asked Emile Bunt of Aon Consulting to get some annuity quotes to give you a rough idea of what's available. I assumed you were both 78. He says that, for $18,000, you could get an annuity that started out paying you about $130 a month, with the amount rising by 2 per cent a year to take inflation into account. Payments would continue for the first five years even if you both died within that period, with the money going to your estate. After that, payments would drop by one third when the first one of you died.
Your initial return, of $1560 a year, is 8.67 per cent. Not bad for a secure investment. And, with the 2 per cent increments, the return improves a little over time.
What's more, the insurance company has already paid tax on the money, so you pay no more tax on it.
The big drawback is that there won't be any principal left for heirs to inherit.
In any case, I don't think the elderly should sacrifice too much for their children. In most cases, the parents have given plenty over their lifetimes. They're entitled to enjoy their retirement.
By the way, anyone considering an annuity might be interested in www.livingto100.com.
You fill in your age and gender and answer 23 questions about your lifestyle, family history and so on.
The website calculates how long you are likely to live. It also gives information on why, for example, eating bacon might shorten your life.
Q. Several times in your column I have noticed that you have given incomplete, and therefore possibly misleading, information on annuities. Annuities for couples which reduce on the death of the first recipient are not the only option.
For a lesser monthly amount, the full monthly payment can be continued until both are deceased. The 2 per cent increase is also optional.
Tower have just sold me a policy exercising both of these options.
A. You're quite right. Several annuity features are optional.
I usually write about annuities with a 2 per cent inflation allowance - and also a guarantee of five or 10 years - because I think most people would want those features. But not necessarily.
As for payments on a joint annuity decreasing after the first spouse dies, some couples are happy if the payments are halved. That seems rather extreme to me. One person can't live equally comfortably on half the money that a couple can live on.
Still, the bigger the reduction in payments on the first death, the bigger your monthly payments will be at the start. You've gone to the other extreme, choosing no reduction in payments, in exchange for smaller payments at the start. Fair enough. As the old saying goes, you pays your money and you takes your choice.
Correction
What a difference a few words make.
A paragraph in the first answer in last week's column read: If you want to maximise your returns, it's always a better bet to spread your money over several different types of assets.
I had written, If you want to maximise your returns, for a given amount of risk, it's always ... etc. The subeditor, short of space, edited out for a given amount of risk.
Unfortunately, this changed the meaning significantly.
If you want to simply maximise returns over the long term, you're best bet is to stick with the asset type that tends to bring in the highest long-term returns, namely shares.
But concentrating only on shares certainly boosts your risk. Any investor in international shares over recent years can attest to that.
If there's a limit to how much risk you're willing to take - and that's the case for most people - it's best if you invest in several different types of assets.
* Mary Holm is a freelance journalist and author of Investing Made Simple.
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