The Reserve Bank of Australia (RBA) has lowered the cash rate to 3%, the lowest level since the beginning of the Global Financial Crises. Chances are that in an effort to maintain activity and stimulate the economy there may be further reductions.
The bank term deposit rates have subsequently fallen from record highs of in excess of 7% p.a. (5 year deposit rates 2 years ago) to current levels of below 5% and edging closer to 4% on terms from 1 to 5 years. The continuing trend may see these rates fall below 4% in the next 12 months.
Obviously this will have an impact on the retirement income for many retirees. So, what is the alternative?
Our fundamental belief, as stated in previous blogs and certainly our advice to clients, is that the protection of retirement capital is our principal objective. We base our long term interest projections on a rate of 5% p.a. For deposits which we have locked into rates in excess of 5%, we consider the higher rates as a premium. If the rates fall below our projected 5% rate, to say 4% or even less, the adjustment to client cash flow is not dramatic and should be manageable.
On the other hand if the client’s retirement capital took a hit of 20% or 30%, the consequences are indeed dramatic.
I have previously questioned the motives of economists, journalists and advisors encouraging, perhaps even insisting that it may be time to change from fixed deposits to shares or property in order to maintain or improve yield (returns) on retirement savings.
Seriously, how would you justify changing a clients profile from totally conservative to totally aggressive? The promise of maybe(?) higher returns.
The market risk of investing in shares has not changed, not for the better in any case. We have just past the 5th anniversary of the beginning of the GFC and our share market is still 30% below high levels in October 2007. Sure the dividend yields have looked attractive for a while but that’s on the back of reduced share values.
We are not discounting the fact that shares, property and other growth assets have their place in a portfolio where surplus funds can be used for long term capital growth. However we maintain that fixed income can not be sourced from volatile investments.
We believe that the Australian banks will continue to offer relatively high deposit rates (certainly relative to the rest of the western world) as their need for capital is increasingly funded from local deposits. In the rest of the western world, nervous investors are still moving their savings away from the markets to the banks and getting returns of 0.5-2% p.a. with much less security than what is available here in Australia.
If you have any concerns regarding the falling interest rates and the impact this may have on your retirement cash flow and lifestyle please consult your adviser.