Planning crucial for retirees

Self-funded retirees need to change their mindset about their investments in an outlook of continued low interest rates, says SA economist Darryl Gobbett.

Self-funded retirees need to change their mindset about how their investments are going to meet their spending needs in an outlook of continued low interest rates.

Cash flow from interest rates of 1-2 per cent and dividend and rental yields of 3-4 per cent per year are unlikely to meet lifestyle needs so plan to set aside cash in the good times and be prepared to draw on capital.

The RBA is likely to cut the cash rate again with the economic uncertainties about the coronavirus on top of an already slowing Australian economy and no signs of a pick up in wages growth or inflation.

With the banks not wanting more bad press after their Royal Commission, these cuts will be passed on faster than in the past to mortgage clients and term deposit interest rates. In part this is because at- call deposit interest rates are already close to zero.

This situation of very low, or effectively zero interest rates, seems likely to be with us to the mid 2020s at least.

Term deposit rates here of 1-2 per cent out to three years or so are on a par with those in the US and Britain.

Economist Darryl Gobbett.

So personal investors are getting better interest rates than the professionals or money market funds. Investments offering higher interest rates will mean higher risk, often as a result of investments in second mortgages or property development lending.

A decade ago we could put together a portfolio that would give enough regular ongoing income to live off now and capital growth for the future.

A different mindset and active management is now needed. Cash and term deposits are held really for capital security with enough on hand to meet spending needs for at least the next 2 -3 years. Shares and property are held for income of 3-4 per cent and capital and income growth.

When strong capital growth occurs, as has happened over the past 12 months before the current downturn, take some profits and build cash and term deposits so there is 2-3 years of spending in the bank.

Then you can spend with confidence through the downturns like now. And you control when you sell investments, not being panicked when prices drop. You might even have the capacity to pick up some bargains.

If you invest in managed funds, hold funds that specialise in specific sectors. Hold your cash needs in cash accounts and term deposits that you control.

But it is about the personal risk and return choice and being able to sleep at night.

In this environment, the Federal Government could help savers who depend on part age pension by cutting the deeming rates from the current 3 per cent to 1.5 per cent to be more in line with readily available term deposit interest rates. The upper asset test threshold should also be increased from the current $863,500 where the pension cuts out to recognise the fall in income yields.

Darryl Gobbett is visiting fellow at the SA Centre for Economic Studies and a director of Fleurieu Partners.

– Please seek the advice of a financial adviser before making investment decisions.