Rates on hold, but pain doesn’t ease for retirees

While the RBA has today kept Australia’s cash rate on hold, investors, particularly Australia’s 3.8 million retirees continue to be faced with what has now become a futile battle to make ends meet from cash investments.

Right now, for the first time in almost two decades (and that was an aberration due to the short term impact of GST on inflation), if your retirement savings are in overnight cash, 1-year term deposits or 10-year bonds, the interest generated on those savings is less than the rate of inflation of goods and services.

So, the way things stand, by holding cash or investing cash-backed assets for a year, at the end of the year you’ll have less buying power than at the start of the year and we are still anticipating another rate cut, which will drive these real interest rates further into the red.

A further rate cut seems highly probably within the next twelve months, meaning returns on cash, term deposits and products linked to bank bill rates will likely continue to plunge.

Many income-related products, like income securities or bank hybrids are priced at a margin to bank bill rates, and we have already seen 90-day bank bill rates fall below 1%, which is already crimping their income.

Many retirees are only just now realising they can no longer retain their quality of life from yield on cash and term deposits.

We’ve certainly seen increased retail inflows into our income-focussed investments, the hunt for income is probably the most desperate I’ve seen in my 30 years in investment management.

Diversification is arguably the only free lunch. While investors moving from ‘safe’ cash to riskier assets like equities, non-government debt, property or infrastructure, are taking on additional investment risk, good diversification can help reduce the amount of risk taken.

The people in a real bind, are those who have already derisked. Investors who are still largely or wholly invested in cash or term deposits have missed the very good returns of the past few years, particularly those in 2019.

Balanced fund returns have been very strong, whereas lower risk cash focussed strategies have lagged, particularly in 2019.

The risk for these investors is that they switch to riskier assets after those assets have risen substantially in value, and possibly before they may take a fall. Having said that, we believe it is difficult for asset values to fall significantly given the expectation that very low interest rates are likely to be around for a considerable period of time.

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Plato Investment Management is an Australian owned boutique equities fund manager specialising in maximising retirement income for pension phase investors and SMSFs. To find out more click "contact us" below.