Low interest rates carry high risks for retirees

RBA Governor Philip Lowe meets and Treasurer Josh Frydenberg. Picture: David Geraghty.

The forgotten people in the current market gymnastics are the millions of Australians who made sacrifices during their working lifetime so that they would have enough money to fund their own retirement.

They never envisaged that Reserve bank Governor Philip Lowe and Treasurer Josh Frydenberg would combine to reduce their income from bank deposits and force them to take greater and greater risks via the sharemarket to maintain their standard of living.

Those risks involve many self-funded retirees buying more shares to gain income to replace the token rates now offered on term deposits. As a result self funded retirees are now in the edge of their seats each day and night as local and overseas markets swing wildly. On Wall Street with the 10 year bonds now at a 10 year low the market fears a major share market fall. It’s not good for retirees.

And to add to the tension, while on average young people have a low death rate from coronavirus, among those aged around 70 and older the death rate is in the 15 per cent vicinity.

The Reserve Bank in Australia, like other global central banks think that when they lower rates it will stimulate the economy. In Australia Treasurer Frydenberg demands the banks “pass it on” by reducing mortgage interest rates when Philip Lowe reduces the official rate.

That catch cry is great for young people with mortgages. But for self-funded retirees the Frydenberg call “pass it on” call has a different and fearful meaning. The banks “pass it on” by lowering term deposit rates. That is, lowering retirees’ income.

To be fair Frydenberg has promised to again lower the so called deeming rate, whereby pensioner couples are assumed to earn 1 per cent on the first $86,200 of their combined investment assets, plus 3 per cent on their investment assets over $86,200. It might be fairer to suspend the process.

One of the reasons that the Reserve Bank’s interest rate cuts do not stimulate the economy is that the older age group immediately tighten their belts while the younger people seeing what is happening to their parents use the extra funds to accelerate their mortgage repayments.

At this stage bricks and mortar assets like dwellings have been performing well so retirees with their own dwelling are watching their actual net asset position rise while their income falls.

Thanks to franking credits the sharemarket has provided good income albeit a bumpy ride. As I have discussed previously, share market falls of around 10 per cent are merely corrections. But if and when they move into the 15 to 20 per cent range the market itself, plus the forces that are driving it down, influence the economy so property prices are vulnerable.

My fear is that if the sharemarket keeps falling petrified retirees will move out of shares into mortgage backed unit trusts that offer liquidity but are backed by illiquid assets: long term mortgages.

In past crashes I have seen horrible losses from this type of security when. residential dwellings fall in price six to 18 months after a major share market crash.

I have been urging Josh Frydenberg to encourage our blue chip borrowers like BHP, Telstra and Transurban to use the local market rather than borrow so much overseas.

Meanwhile with most overseas countries now off the agenda for most retirees it is time to take the car or train to local places and enjoy the lifestyle .