Many investors fall victim to what economists call “the money illusion”: thinking about money in nominal rather than real terms.
A $100,000 term deposit earning 4.5% generates $4,500 annually, which feels like growth.
But for someone paying 33% tax, the after-tax return is just $3,015 (3.015%). With inflation at 2.7%, this creates a real return of just 0.315%. For those in the top tax bracket (39%), this return becomes 2.745% – providing a microscopic real return of $45. That’s barely enough to buy a decent bottle of wine to drown your wealth preservation strategy sorrows.
Major bank economists forecast the OCR will fall to 2.5% by the end of 2025 or early 2026. If term deposits drop to around 3%, a 33% taxpayer will earn an even measlier 2.01%.
Hidden costs of cash comfort
Opportunity Cost: While current term deposits offer reasonable returns, historical equity market returns in New Zealand averaged 7-10% annually over longer periods. That 2-5% difference compounds substantially over decades.
Rate Dependency Risk: With the two-year swap rate expected to drop to 2.8% as the OCR reaches 2.5%, retail deposit rates will follow. Unlike growth assets that can benefit from economic recovery, cash offers no upside participation.
Inflation Protection: Cash provides no hedge against rising costs. With administered prices driving near-term inflation pressures, purchasing power erosion remains a persistent threat.
The economic reality check
New Zealand’s economic recovery stalled in the second quarter. Spending is constrained by global economic policy uncertainty, falling employment, higher goods prices, and declining house prices. RBNZ notes there is scope to lower the OCR further if medium-term inflation pressures continue to ease as expected.
This makes holding large cash positions riskier; cash-savers face declining returns and miss potential recovery gains in other asset classes.
Cash has its place – as part of a strategic, sophisticated portfolio, where professional advisers can implement a bond laddering strategy (providing income stability with superior yields to deposits), liquidity management to provide regular cash flow and reduce the need for large cash reserves and can recommend PIE funds and other tax-efficient structures that minimise the tax drag.
The value of professional advice
History has shown many investors start panic selling during downturns, chasing performance at market peaks, or hoarding cash.
When cash returns are low, investors venture into adventurous territory: junk bonds, private credit, mezzanine debt arrangements, and other high-yield instruments that carry higher risks.
Working with a fee-only, fiduciary adviser is invaluable. Look for advisers who:
Conduct thorough discovery of your financial situationExplain their investment philosophy and process clearlyProvide transparent fee disclosure with no hidden commissionsDemonstrate relevant credentials (CFP, AIF, CEFEX)Show measurable progress tracking methods
The bottom line
With NZ’s economic headwinds, sitting in cash isn’t the safe option – it’s the wealth erosion option.
“She’ll be right” doesn’t cut the mustard when your money’s losing value faster than a leaky boat. After tax and inflation, that “safe” term deposit is barely keeping you afloat. Your future wealth depends on making this distinction now, not when it’s convenient.