How Rising and Falling Interest Rates Change Your Retirement Income (NZ)

Term deposit income rises and falls with the OCR. We explain reinvestment risk, why an all-cash retirement is more fragile than it feels when rates drop, and how to ladder term deposits alongside KiwiSaver and growth.

Many New Zealanders retire with a large slice of their savings in term deposits, drawing on the interest to top up NZ Super. That income is comfortable when rates are high and uncomfortable when they fall. Because term deposit rates track the Reserve Bank's Official Cash Rate, the cash income a retiree earns moves with the rate cycle, often by a lot. This article explains why that happens, what it does to your income, and how people manage it.

TL;DR: Term deposit rates follow the OCR. The OCR peaked at 5.50% in 2023 and had fallen to 3.25% by July 2025 ¹², pulling one-year term deposit rates down to roughly 4.9% from near 6% ³. For an all-cash retiree that is a real income cut. Spreading money across a ladder, KiwiSaver and some growth assets makes income less fragile when rates drop.

Why do so many NZ retirees rely on term deposits?

Term deposits are popular with retirees for good reasons. The capital is held with a bank, the interest rate is fixed for the term, and you know exactly what you will receive at the end. After a working life of saving, that certainty is reassuring, and it is far simpler than managing a share portfolio.

There is also a behavioural pull. Once you stop earning a salary, the idea of your balance falling in value, even temporarily, feels worse than it did when you were still contributing. A term deposit does not show a falling balance on a statement the way a growth fund can, so it feels safe.

The catch is that "safe" and "stable income" are not the same thing. Your capital in a term deposit is stable in dollar terms, but the income it produces is not. Each time a deposit matures, you reinvest at whatever rate the market is offering then, and that rate is largely set by the Reserve Bank. So a portfolio that feels rock-solid can still deliver a noticeably smaller income from one year to the next.

How does the RBNZ Official Cash Rate drive the income you earn?

The Reserve Bank of New Zealand (RBNZ) sets the Official Cash Rate (OCR), the benchmark interest rate for the whole economy. It reviews the OCR seven times a year and moves it up or down mainly to keep inflation in check ³. When the OCR rises, borrowing and saving rates across the banks tend to rise with it; when it falls, they fall.

Retail term deposit and savings rates are closely linked to the OCR. Banks fund themselves partly through deposits, so when the OCR is high they pay savers more to attract that money, and when the OCR is low they pay less. The link is not exact or instant, banks also price in competition and their own funding needs, but the direction is reliable: term deposit rates broadly follow the OCR over time ³.

That is why the rate environment can change so much in a couple of years. The OCR was held at a peak of 5.50% from May 2023 until August 2024, then the Reserve Bank began cutting. By early July 2025 it had fallen 2.25 percentage points to 3.25% ¹². A retiree who locked in a one-year term deposit near 6% in 2023 and came to reinvest in 2025 found the going rate was about 4.9% ³, a meaningful drop in income on the same pile of savings.

What happens to your income when rates fall?

The arithmetic is straightforward, which is what makes it sting. Consider $300,000 held entirely in one-year term deposits, with the interest used as income. The table below shows the difference between a high-rate and a low-rate environment, before tax.

The same savings, a different income, as rates change

Figure (described): a dual-line chart showing the RBNZ OCR over recent years alongside indicative one-year term deposit rates, illustrating how the cash income a retiree earns rises and falls with the rate cycle. The two lines move together, with term deposit rates sitting below the OCR's influence as it climbs to 5.50% and then eases to 3.25%. Sources: RBNZ OCR decisions and retail interest rate series ¹²³.

The illustration above uses round numbers to show the mechanism; it is not a prediction of future rates. The point is the size of the swing. Moving from 6% to 4.9% cuts the income on $300,000 by about $3,300 a year before tax, without the saver doing anything wrong. After Resident Withholding Tax (RWT), the after-tax drop is smaller in dollar terms but still real ⁴.

Two things soften the blow, and both matter. First, NZ Super does not fall when interest rates fall. For the year to 31 March 2026, a single person living alone receives $1,076.84 a fortnight after tax, about $28,000 a year, and a couple who both qualify receive $1,656.68 a fortnight combined, roughly $43,000 a year ⁵⁶. That guaranteed base is unaffected by the OCR. Second, lower interest rates often come alongside lower inflation, so your spending may not be rising as fast either. Neither fully offsets a rate cut, but they mean the income drop is rarely the whole story.

What does reinvestment risk mean for a term deposit ladder?

Reinvestment risk is the technical name for the problem above: the risk that when your deposit matures, you can only reinvest at a lower rate than before. With term deposits, you are never locked in for life. Every maturity is a chance to earn more, or less, depending on where rates are.

In a rising market, reinvestment risk works in your favour, you keep rolling into higher rates. In a falling market it works against you. A retiree who built an income plan around 6% rates in 2023 was, in effect, assuming those rates would persist. When they did not, the plan had to absorb a cut.

A term deposit ladder, holding several deposits that mature at different times, does not remove reinvestment risk, but it spreads it. Instead of your whole balance repricing at once on a single bad day, only a portion reprices at each maturity, so your average income moves more gradually. That smoothing is valuable, but it is worth being honest that a ladder still drifts down over time when rates fall across the board. It softens the timing, not the direction.

Why is an all-cash retirement riskier than it feels?

Putting everything in term deposits feels like the cautious choice, and in one sense it is, your capital does not bounce around with markets. But "all cash" carries two risks that are easy to overlook precisely because they do not show up as a falling balance.

The first is the income risk we have been discussing. When rates fall, an all-cash retiree has nothing else to lean on; the income simply drops. There is no growth component quietly building value to offset it.

The second is inflation. Over a 25 to 30 year retirement, the cost of living tends to rise, and cash struggles to keep pace, especially after tax. If your term deposit pays 4.9% before tax and inflation is running at 3%, the real growth left over is slim once RWT is taken out. Money held entirely in cash can slowly lose purchasing power even while the dollar figure looks stable. Our guide to inflation and your retirement savings goes into this in more depth.

So the fragility of an all-cash plan is not that you will lose your capital, you very likely will not. It is that your income is exposed to the rate cycle and your purchasing power is exposed to inflation, with no growth layer to cushion either. That is a different kind of risk from market volatility, but it is still risk.

How do you balance term deposits with growth assets and KiwiSaver?

The usual answer is not to abandon term deposits, they do a real job, but to stop relying on them for everything. Most retirement plans hold cash for near-term spending and certainty, and growth assets, often inside KiwiSaver, for the longer run.

The logic is about time horizon. Money you will spend in the next few years is best kept stable, so term deposits and cash suit it well. Money you will not touch for ten or more years has time to ride out market ups and downs, so some of it can sit in a balanced or growth fund where, over long periods, it has a better chance of outpacing inflation, though with no guarantee and with real short-term volatility along the way.

KiwiSaver does not stop at 65. You can leave it invested and draw from it gradually, and many people keep a portion in a growth or balanced fund well into retirement for exactly this reason. There is also a tax angle worth knowing. Term deposit interest is taxed at your full marginal rate through RWT, up to 39% on income over $180,000, whereas income from a Portfolio Investment Entity (PIE) such as a cash PIE fund or KiwiSaver is capped at a Prescribed Investor Rate (PIR) of 28% ⁴. For higher earners, that cap can leave more in your pocket after tax for the same headline return.

Returns are not guaranteed. The value of investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future performance. How much to hold in cash versus growth depends on your spending, your other income and how you feel about market movements. Our guides on combining KiwiSaver with your other savings and choosing a KiwiSaver fund at retirement work through the mix.

How do you ladder term deposits to smooth rate swings?

A term deposit ladder is a simple structure. Instead of putting your whole cash allocation into one deposit, you split it across several with staggered maturities, then reinvest each one as it matures.

A common approach looks like this:

1. Split the cash into equal parts. For example, divide your term deposit money into four or five portions.

2. Stagger the terms. Place them so one matures every few months, or one each year, rather than all on the same date.

3. Reinvest each maturity for a fresh full term. As each deposit comes due, roll it into a new longer-term deposit (or spend it, if that portion is funding near-term income).

4. Keep some accessible. Leave a portion in shorter terms or on call so you are not forced to break a deposit, which usually costs you interest.

The benefit is smoother income. Because only one rung reprices at a time, a single move in rates affects part of your cash, not all of it, so your average rate moves gradually rather than in one step. The trade-off is that a ladder will not let you fully time the market, you accept the prevailing rate at each maturity. It is a tool for steadiness, not for beating rates.

A ladder also pairs well with a growth layer. The cash rungs cover spending you can predict, while KiwiSaver and other growth assets handle the long horizon, which is the combination most retirement plans are trying to reach.

How should you adjust your plan as the rate cycle turns?

Interest rates move in cycles, and a plan that made sense at 5.50% may need a look at 3.25%. The aim is not to predict the Reserve Bank, which few people do reliably, but to make sure your income does not depend on rates staying where they happen to be today.

When rates are high, it can be worth thinking about how exposed you will be when they eventually fall, since locking everything into short terms leaves you fully exposed at the next maturity. When rates are low, the question is more about whether sitting entirely in cash is leaving your income and your purchasing power unnecessarily thin, and whether a portion belongs in growth assets for the long run instead.

These are general considerations, not a recommendation to do any particular thing, the right answer depends on your spending, your other income, your timeframe and your tolerance for market movement. A review with an adviser can model how your income would hold up if rates fell further, and help you decide how much certainty you want to pay for. Our guide to building a guaranteed income floor in retirement covers how the pieces fit together.

Frequently asked questions

Why does my term deposit income fall when the OCR is cut? Banks set their savings and term deposit rates with reference to the Official Cash Rate. When the RBNZ cuts the OCR, banks generally pay less on new deposits, so when your deposit matures you reinvest at a lower rate. The OCR fell from a peak of 5.50% to 3.25% between 2023 and July 2025, and one-year term deposit rates fell from near 6% to about 4.9% over a similar period ¹²³.

What is reinvestment risk in plain terms? It is the risk that when a term deposit matures, the best available rate is lower than the one you had, so your income drops even though you did nothing wrong. It is the flip side of the certainty term deposits offer: you are only locked in for the term, then you are back at the mercy of current rates.

Does NZ Super fall when interest rates fall? No. NZ Super is set by the Government and adjusted each 1 April, independent of the interest rate cycle. For the year to 31 March 2026 it pays a single person living alone $1,076.84 a fortnight after tax (about $28,000 a year), and $1,656.68 a fortnight combined for a couple who both qualify (about $43,000 a year) ⁵⁶. That guaranteed base does not move with the OCR.

Is keeping everything in term deposits the safe option in retirement? It is stable in capital terms, but it is not free of risk. An all-cash plan exposes your income to the rate cycle and your purchasing power to inflation, with no growth layer to offset either. Many people hold cash for near-term spending and some growth assets for the long run to balance these risks. What suits you depends on your circumstances.

Are term deposits or a cash PIE fund better for tax? Term deposit interest is taxed at your full marginal rate through RWT, up to 39% for income over $180,000. A cash PIE fund (a Portfolio Investment Entity) caps the tax rate at a Prescribed Investor Rate of 28%, so a higher earner can keep more after tax for the same headline rate ⁴. Whether a PIE suits you depends on your income and PIR.

How does a term deposit ladder help? A ladder spreads your cash across several deposits maturing at different times, so only part of it reprices at each maturity. That smooths your average income when rates move, rather than letting the whole balance reprice on one date. It does not remove reinvestment risk, but it softens the timing of rate changes.

This article is general information only and is not personalised financial advice. It does not take into account your particular financial situation, goals or needs. Before acting, consider whether it's right for you and seek advice tailored to your circumstances. Craig Smith Business Services Ltd (FSP712931), trading as Smiths Financial, holds a Class 2 licence issued by the Financial Markets Authority and is a member of the Financial Dispute Resolution Service (FDRS). Written by Henry Smith, Financial Adviser; reviewed by Craig Smith, Principal Adviser. Last reviewed 5 July 2025.