News Limited Network Courier Mail 05 December 2012
RETIREES and other investors relying on bank and other desposits are the losers after he Reserve Bank slashed interest rates to their lowest since the Global Financial crisis.
National Seniors chief executive Michael O’Neill said some pensioners might have $5000, $10,000 or $15,000 put aside in term deposits, "so they are impacted through to those would might have substantially more than that and are totally reliant on it".
Experts estimate more than one million, mostly older, Australians will be hit by reduced incomes through interest rates.
Self-funded retirees who rely only on cash investments have had their incomes cut by a quarter in the past year.
A Your Money analysis last month has found that since the Reserve Bank started cutting rates last year, typical returns from term deposits and online savings accounts have slumped 15-30 per cent.
Accounts that paid more than 6 per cent interest are now close to 4.5 per cent, so every $1000 of income a retiree was receiving is now just $750.The RBA meets again tomorrow and some economists expect another rate cut. A few forecasters expect several cuts in the next 12 months.
Australians in Retirement spokesman Vince Watson says self-funded retirees and part-pensioners are also battling sharp rises in living costs such as electricity and insurance.
"They're not going to die of old age - they're going to die of financial worry," he says.
Palmer Portfolios principal Joel Palmer says many retirees switched from shares to cash in the global financial crisis.
"Many of those same investors are still sitting in cash and suffering a second, silent GFC, as they watch their income eroded by a relentless series of interest rate cuts," he says.
But investors wanting extra income must be prepared to take on extra risk, he says. Property, bonds and shares are the key alternatives.
Bonds have done well but there is no certainty they will do better than cash in coming years, buying an investment property may not be sensible for a retiree, while shares - like the other two - don't have the stability of cash, Palmer says.
"A conservative investor sitting 100 per cent in cash might be well placed to consider even a 25-30 per cent allocation to good quality Australian shares.
"If you pick good companies, then it is likely they will increase their dividend payout in future years, which also builds inflation protection into your income."
Roe Financial certified financial planner Tim Lindsay says all investors - even retirees - need to adjust to the times.
"There's always a need for growth that gives reasonable returns, such as quality shares and property investments, but it can be dangerous short term trying to chase an alternative to term deposit interest. Just looking at buying dividend-paying shares for the next 12 months is not going to work."
EXTRA INCOME BRINGS EXTRA RISK
Bank shares are paying 6-7 per cent income as well as tax benefits, but prices rise and fall with market sentiment.
Corporate debt such as listed income securities and corporate bonds can beat bank interest.
Listed property trusts were pounded in the GFC but now offer more reliable returns. View them as a five-year investment.
Infrastructure stocks pay government-regulated returns but should be viewed as five-year investments.
Avoid overseas investments, which carry currency risk, and any "manufactured" income streams where you don't understand the product.
Source: Middletons Securities