Interest rate cut leaves retirees with dilemma

One group instantly became worse off with yesterday’s rate cut — retirees.

Joan and Rob Padgett. Picture: Aaron Francis

As home loan borrowers sighed in relief yesterday with the announcement of a widely anticipated official rate cut, one group instantly became worse off — retirees, especially the estimated million people in self-managed superannuation funds.

What’s more, it seems rates are heading still lower — markets are pricing in a 50 per cent chance of another cut as early as November.

Yesterday’s cut brought official Reserve Bank of Australia rates down to 1.5 per cent: at this level retirees, who depend heavily on deposit rates, must now seriously consider redirecting their cash elsewhere.

Unfortunately, their choice is stark — lower income from ‘safe’ cash deposits or higher risk in volatile investment markets.

Rob and Joan Padgett, who live in Austinmer, a Wollongong northern suburb, retired a decade ago. He is a former business consultant and she a former Art Gallery of NSW employee.

They depend entirely on investment income. Ms Padgett said yesterday: “It seems to me that it’s the only solution they seem to come up with … oh we’ll cut rates again. But there’s the silent majority that is reliant on cash.”

Adds Mr Padgett: “Anyone who’s looking to fund themselves is obliged to look at riskier investments and equities are about as risky as I’m prepared to go.”

While retirees like the Padgetts watch cash account returns continually dwindle, the Commonwealth Bank and NAB moved to exploit the situation yesterday, paring mortgage rates a fraction but actually lifting deposit rates about 0.5 per cent: clever marketing, but doing little to change retirees’ fundamental dilemma.

Financial advisers generally recommend retirees have most savings in conservative investments, typically cash. But at current cash rates — where 3 per cent is comparatively strong — stocks, bonds and property must now be on their agenda.

On the stockmarket the average dividend yield is running around 4 per cent; franking credits this can take the effective income rate closer to 6 per cent. Until very recently bank stocks were the main focus of pensioners reluctantly engaged in the “hunt for yield”. However, in recent months there has been a clear swing towards property trusts.

Retirees are also looking at bonds and direct property investment — rather indirect holdings through property trusts. Most investors are still unfamiliar with owning bonds directly, so portfolio exposure is largely through managed funds. There are also widespread concerns that bonds have become overpriced.

In short, lower cash rates means tougher choices for retirees and no guarantee of better returns.