How to make the most of interest

(Text by Eduardo Cubas Pereira, a certified CFP® (Certified Financial Planner) personal financial planner, granted by the Brazilian Institute for Certification of Financial Professionals. Eduardo is an investment advisor at Manchester Investimentos.)

From Infomoney - In recent months, one of the points that most divides the opinions of analysts and market scholars has been the direction of interest rates. However, this divergence is mainly valid for the short term. The uncertainties surrounding the topic focus primarily on the next 12 to 18 months. If we look at the evolution of annual periods, we can see that Brazilian interest rates have been falling consistently as our country leaves behind the difficulties of the pre-Real Plan period.

There is also another legacy from the pre-Real Plan period. Due to the uncertainty surrounding our economy before that time, Brazilian investors were educated to focus on short-term investments. This way, in case of major changes, the investor could act. Currently, the focus on the short term has been maintained, where high liquidity causes the investor to lose profitability.

Lack of planning is the main culprit preventing Brazilians from achieving their much-desired "financial independence." Effective planning includes, among other aspects:

a) Desired retirement income,

b) Adjusting the value of this income for inflation between the current date and the desired retirement date.

c) Current net worth plus the capital accumulation needed to reach that level.

d) The necessary return on investment to reach that level.

A conservative investment strategy currently allows investors to achieve returns of up to 6% above inflation. If we compare this return to developed economies, we see that it is well above the global average.

Therefore, for investors in the accumulation phase, there is an opportunity to shorten the projected retirement period if there is a possibility of investing capital focused on the long term (over 3 years).

For retired investors, it's possible to improve portfolio profitability. This results in a higher standard of living in retirement.

Example: Consider a retiree who needs R$12.000 per month and wishes to maintain this standard of living over the years. If they use the world average of approximately 4% annual return above inflation, they will need R$3.000.000. This was the actual situation in Brazil about 12 months ago for the scenario described above.

With the recent rise in interest rates, the same investor can maintain this standard of living with R$ 2.000.000. A capital of R$ 3.000.000 would improve their income to R$ 18.000 per month.

One investment that deserves highlighting today is the inflation-linked government bond (NTN-B). This bond is a loan that the investor makes to the National Treasury. Therefore, it is the safest investment in the country with regard to credit risk. The investor should focus on the long term, at least 5 years, and can achieve returns exceeding 5,5% per year plus inflation.

Another very attractive alternative is incentivized debentures. A debenture is a loan to a company. When the company or the project for which it is raising money is linked to the infrastructure sector, they are exempt from income tax for individual investors. In this case, the investor should seek out solid companies, since in case of bankruptcy the capital may be compromised. In any case, there are alternatives with risk very close to that of government bonds. However, incentivized debentures have the tax advantage that improves their profitability. In these cases, it is possible to reach 5,5 to 6% above inflation net.

Investors who actually intend to focus on shorter terms can take advantage of the high interest rates to maintain attractive returns without taking on significant risks. Investments such as LCI and LCA (Real Estate and Agribusiness Credit Notes) are also exempt from income tax for individuals and offer returns of up to 11% per year, depending on the term.

Considering that current Brazilian inflation is between 6% and 6,5%, investments with terms shorter than 2 years at these rates can also be considered attractive. It's important to note that LCIs and LCAs typically do not have daily liquidity. The investor chooses one of the maturity options, which are usually between 1 and 24 months, and should not withdraw the capital until then.

It is important to assess each investor's retirement needs, liquidity requirements, and risk tolerance before making financial investments.

The information in this article is for informational purposes only and includes examples that may facilitate decision-making. However, to create a more comprehensive financial plan and make appropriate investment decisions, I suggest consulting a professional Financial Planner.

The text reflects the author's opinions. Infomoney is not responsible for the information above or for any losses of any kind resulting from the use of this information.