The Reserve Bank’s decision this week to cut rates was met with raucous celebrations.
But amid cries of ‘cheaper money!’ and ‘improved business confidence!’, one group of Australians has been forgotten: retirees on fixed incomes.
Retirees are the nation’s great savers. According to National Seniors Australia, almost half of all term deposits are held by the over-65s. They rely on interest rates to give their retirement savings a boost.
So for them, and for the five million savers who don’t have a mortgage, the latest rate cut is not good news.
What the PM said
Prime Minister Tony Abbott acknowledged that lower interest rates would hit retirees harder than the rest of the population. However, he said he believes retirees will understand that lower rates are needed for Australia’s wider economic health.
“The great thing about older Australians,” said the PM, “is that they have our nation’s interests at heart.”
Regardless of whether retirees are willing to take a hit for Team Australia or not, the fact remains interest rates are at an all-time low and are likely to stay that way. So what can retirees do to minimise the pain?
Watch the banks
The banks have made a big deal about cutting their mortgage rates, but they are less likely to publicise a cut in savings account interest rates, says Michelle Hutchison, money expert at comparison website finder.com.au.
“As we have seen the banks are not announcing they are cutting savings account interest rates, but that doesn’t mean they’re not going to.”
Ms Hutchison urges savers to keep a close eye on what their bank does, and if they cut the interest rate too low, shop around for better rates.
However, she says if you spot a bank account offering a better deal, be sure to read the fine print, as there may be conditions, such as restrictions on withdrawals, high deposit requirements, and a distinction between ‘base rates’ and ‘bonus rates’.
Look at alternatives to cash
If you have a decent amount of money in the bank, you might be wise to consider diversifying into other investments, such as shares, property trusts and annuities.
According to Deborah Kent, principal of financial advice firm Integra Financial Services, retirees on fixed incomes need to be aware of the fact that interest rates are likely to stay low for the foreseeable future.
“So many retirees rely on cash and term deposits for their retirement income, and when interest rates go down, their income also goes down, often substantially,” she says.
“But when you look at other asset classes a lot of retirees don’t want to go towards shares because they see the volatility in it. But of course cash and term deposits have their own volatility because of interest rate movements.”
As an adviser, Ms Kent recommends diversifying into assets such as domestic and global shares, and property. While most retirees can’t afford to buy an investment property, they can invest in property via listed property trusts.
Diversify, but beware the risks!
“Cash gives you certainty, but at the moment it’s certainty of failure,” says Richard Ebbs, national strategic advice leader at Mercer Financial Advice. Lower rates compound your losses over time.
Shares, property trusts and infrastructure trusts are all ways of making your money last longer. There are also ways of maximising your tax position.
“But for goodness sake understand the downside!” warns Ebbs. He says the layman will struggle to get his or her head around the complexities of investment, which is where a financial adviser comes in.
If you are a member of super fund, your fund will be able to point you in the right direction, either through an in-house adviser or by referring you to an independent financial adviser.
Most super funds offer post-retirement account-based pensions which diversify your wealth and pay you an income stream. This is often a low-cost, efficient way of maximising your savings and minimising the risk.