Anyone struggling to live off interest payments in retirement would have been devastated by the RBA’s statement on November 3 that it didn’t expect to increase interest rates for three years.
That came on top of the news of the cash rate being cut to a minuscule 0.1 per cent, which has resulted in term deposits falling to all-time lows.
So if that news is seriously eating into your lifestyle you need to look at other options.
What those options are will depend on a few things: How much money you have invested, what structure you hold it in, and your risk appetite.
One option is to think of yourself more as an investor than an interest earner.
Chant West research director Ian Fryer says “the fixed-interest outlook is pretty bleak, so maybe you should think about withdrawing more capital from your fund to boost your income”.
That means eroding your balance quicker than you otherwise would so before doing this seek financial advice or at least use tools on your fund’s website to work out the effect of doing that.
“The question is how much more can you draw down without running out of money too soon,” Mr Fryer said.
To facilitate this strategy it might pay to choose a more aggressive investment allocation but, again, seeking advice is a good idea.
Shares could help
Another option is holding more growth assets to cover the extra money you are taking out.
Michael Gable, principal of Fairmont Equities, says “there are not really good high dividend options available now so a better mindset is to target growth shares”.
“Companies like CSL, Aristocrat and Macquarie have strong growth profiles.”
As the shares grow in value you can sell some of them to meet your income needs. Again, you should take advice before doing this as it moves you up the risk scale.
How you implement this strategy depends on where your money is.
If it is outside super you are free to do as you like.
Most retail super funds working off platforms allow you freedom to choose particular companies and some major industry funds, like AustralianSuper, Hostplus and Cbus, allow the same.
Bonds a possibility
A third option is fixed-interest investments that allow you to piggyback on the government and corporate bond market.
Using the same fund types listed above, you can buy into bond funds that hold big swags of fixed-income investments.
“An Australian bond fund which typically holds 90 per cent in government securities and the rest in corporate bonds would pay an interest rate of between 1 per cent and 1.5 per cent,” said Garreth Innes, head of Australian Fixed Income with Aberdeen Standard Investments.
“That mightn’t sound like much, but when term deposits are typically paying well below 1 per cent it’s OK. Some managers running corporate bond funds might be delivering in the mid to high 3s [per cent] while bond index funds could offer between 1.5 per cent and 3 per cent,” Mr Innes said.
A product offered by Jamieson Coote Bonds, the JCB Dynamic Alpha Fund, returns interest of 3 to 4 per cent, says principal Angus Coote.
“It smooths out the volatility in the government bond market and has returned 5 per cent for the year to date,” Mr Coote said.
Where do you get it?
Some bond funds are listed on the ASX, while others need to be bought through the issuer.
Retail platforms offer exposure to both types, while big industry funds may allow access to exchange traded funds.
Bond funds not only pay interest but can deliver capital growth if interest rates fall while you hold them.
But Canstar group executive Steve Mickenbecker warns that bond yields are so low they may rise in coming years, eroding bond fund values.
Another way of boosting retirement income is to participate in the government’s Pension Loan Scheme.
This allows you to withdraw up to 1.5 times the amount of your eligible pension payment every fortnight, and you can pay it back whenever you like, or choose for the money to be recouped from your estate after you die.
“Over 25 per cent of our members said they would like to draw down some equity on their home in their home if the interest rate was at the right level,” said Ian Henschke, chief advocate with National Seniors Australia.
“Currently it’s 4.5 per cent, which is way above what housing rates are and it needs to come back [down],” Mr Henschke said.
“Some 80 per cent of 80-year-olds own their own home and the capacity is there to draw down extra money to pay for things like private health insurance.”
Currently, the benchmark home loan rate is as little as 1.83 per cent according to Canstar.
“The government could stimulate the economy by encouraging older people to spend some money and they’ll do that if they lower the rate of the pension loan scheme,” Mr Henschke said.
The New Daily is owned by Industry Super Holdings