Retirees feel the pinch as interest rates fall

Retirees feel the pinch as interest rates fall

Superannuation & Retirement Income
Retirees are feeling the squeeze with ultra-low interest rates. Photo: James Davies

Retirees are feeling the squeeze with ultra-low interest rates. Photo: James Davies

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With another cut in the cash rate by the Reserve Bank last week, the 2 million self-funded and partly self-funded retirees are entitled to feel hard done by.

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With another cut in the cash rate by the Reserve Bank last week, the 2 million self-funded and partly self-funded retirees are entitled to feel hard done by.

As it was, the cash rate was only 1.75 per cent and now, at 1.5 per cent, the earnings of those in retirement will be even less.

While few retirees have all their savings in cash accounts; a large proportion of their savings is in interest-bearing investments such as cash, cash-type investments and fixed interest.

Longer-duration term deposits were paying more than 6 per cent a little over five years ago.

Anyone looking at reinvesting that money in a term deposit now would be looking at earning just over 3 per cent at best. That's even after the banks lifted their interest rates on some of their longer-duration term deposits following last week's rate cut.

The typical balanced superannuation investment option, where most people have their super, has a cash component of about 5 per cent with another 15 per cent in fixed interest, figures from SuperRatings show.

Most people stick with their fund's balanced option once in retirement. However, the next most popular option with retirees – "capital stable" – holds about 25 per cent in cash and just under 40 per cent in fixed interest.

Many retirees will have some of their savings outside of superannuation, in term deposits and in the larger, higher-yielding Australian shares.

There is always a trade-off between investing some of the money with no risk to capital and taking on some risk in the search for higher returns.

But with interest rates so low, there are concerns some self-funded and partly self-funded retirees will take on more risk to chase higher returns.

They have to be careful not to let their desperation for yield blind them to the risks of investing in shares or switching into one of their super funds' more aggressive investment options.

There is little reason to think the lacklustre performance of Australian shares over the past 21⁄2 years is going to improve anytime soon.

Lower capital gains are expected from "growth" investments, such as shares and property. Interest rates are likely to stay low and may even go lower. There's no magic-bullet solution for retirees.

There is some recent evidence that more retirees are feeling the pinch. The minimum annual drawdown from super savings in retirement is 6 per cent for those aged from 75 to 79 and 7 per cent for those aged 80 to 84.

However, the Actuaries Institute says that between the ages of 75 and 85, about a fifth of accounts are being drawn down at more than 10 per cent of their balances – well in excess of the required minimum withdrawals.

The Actuaries Institute predicts more retirees will completely deplete their super funds with only the age pension to fall back on.

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