Historically low interest rates are having a massive impact on Australia’s 3.8 million retirees as they try to make ends meet with cash investments.
“Right now, for the first time in almost two decades (and that was an aberration due to the short-term impact of GST on inflation), if your retirement savings are in overnight cash, 1-year term deposits or 10-year bonds, the interest generated on those savings is less than the rate of inflation of goods and services,” said Dr Don Hamson, managing director of Plato Investment Management.
“So, the way things stand, by holding cash or investing cash-backed assets for a year, at the end of the year you’ll have less buying power than at the start of the year and we are still anticipating another rate cut, which will drive these real interest rates further into the red.”
Plato has seen increased retail inflows into its income-focused investments as the hunt for income becomes the “most desperate” Dr Hamson has seen in his 30 years of investment management.
“Diversification is arguably the only free lunch,” Dr Hamson said.
“While investors moving from ‘safe’ cash to riskier assets like equities, non-government debt, property or infrastructure, are taking on additional investment risk, good diversification can help reduce the amount of risk taken.
“The people in a real bind, are those who have already de-risked.
“Investors who are still largely or wholly invested in cash or term deposits have missed the very good returns of the past few years, particularly those in 2019. Balanced fund returns have been very strong, whereas lower risk cash-focused strategies have lagged, particularly in 2019.”
And another rate cut seems highly likely with the twin emergencies of the bushfire crisis and coronavirus outbreak likely to weigh heavily on Australia’s economy. However, speaking on the prolonged low rate environment Australia is currently in, governor Philip Lowe said “it is possible to have too much of a good thing” and that “there is a balance to be struck here”.
But until unemployment decreases significantly – or the RBA makes more progress towards its inflation target – it’s likely that low rates will be sticking around.
