Interest rate drop increases tough times for retirees

More financial pain for retirees as interest rate drops to new record low

Money
Interest rate drop increases tough times for retirees.

Interest rate drop increases tough times for retirees.

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Retirees forced into riskier investments including a volatile share market to earn returns that exceed the deeming rate, says AIR.

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Many older Australiasns are basically paying banks to hold their savings, say retirees.

They claim recent Reserve Bank's reduction of the official cash interest rate to 0.1 per cent from the previous low of 0.25 per cent will increase the financial pain for pain for fully and partly self-funded retirees and have called upon the government to reduce the deeming rate to reflect the new bank interest rate.

Deeming rates are what the government deems retirees are earning on their investments/savings regardless of actual returns. In May the deeming rates were cut to 0.25 per cent for a single with savings up to $53,000 and 2.25 per cent over this amount. Couples 0.25 per cent up to $88,000 combined and 2.25 per cent over this amount.

"The Reserve Bank cash rate reduction will put more downward pressure on term deposits rates with cash held in bank accounts paying almost zero interest", said president of the Association of Independent Retirees (AIR) Wayne Strandquist.

"After bank account fees are charged and zero-interest paid, retirees are effectively paying the banks to hold their savings", said Mr Strandquist. "This negative return will further lower the living standards of retirees and require larger drawdowns from their retirement savings until they are forced to rely on the aged pension.

"When retired, risk tolerance reduces over time to favour more conservative investments with less volatility and less risk like term deposits, bank savings accounts and other fixed interest investments.

"The reduction in fixed interest by the RBA continues a trend that has seen term deposit rates fall to historic lows, to a fraction of what they were when many retirees left the workforce.

"This negative return will further lower the living standards of retirees and require larger drawdowns from their retirement savings until they are forced to rely on the aged pension.

"The 2.25 per cent government deeming rate is over three times the interest rate that can be actually earned today by retirees on a two-year term deposit with the major banks.

"To earn returns that exceed the upper deeming rate, retirees are forced to consider riskier investments including a volatile share market.

"At the end of the day, retirees just want the secure, reliable, adequate income over a longer retirement that was proposed in the government's Retirement Income Framework in 2016 and we are still waiting," Mr Strandquist said.

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