Record-low interest rates
Self-funded retirees fear low interest rates and rightly so - it means earning less money from their retirement savings.
It was only a few years ago investors could happily turn their back on the sharemarket and opt for the security of a term deposit instead. It was easy to get six-plus per cent - all you had to do was give up access to your funds for a year. Today, savers have to accept a return of around half that. For those wanting to preserve their capital that means halving their income - an impossibility for most of us.
But as the already prolonged low interest rate environment worsens after this week’s rate cut, here are a few options to consider.
1. Covering pension payments
Keep enough cash on hand to pay your pension payments for at least the next three years. This means if you use any idle cash to get a better-than-cash return, it doesn’t matter if these investments go up and down in value in the short-term because you can still pay yourself. It’s a strategy to protect against the worst case scenario of having to sell your investments when the bank account is empty and markets are down.
2. Other defensive options
If shares are still a bridge too far for you, consider other defensive investments like fixed income managed funds. The return you receive should be much better than a term deposit, while still protecting your capital.
The advantage of this type of investment is the manager generally has a view on the future direction of interest rates and can position the portfolio based on this.
Head to brightday’s Featured Funds for a shortlist of potential investment options.
3. Looking offshore
Look at how much you have invested in international shares. With talk of another rate cut in the near future and expectations the local currency could slide even further, it could be an ideal time to invest some of your portfolio offshore if you haven’t already.
When the value of the local currency falls, it makes your international holdings increase in value. The best way to hold international shares is by investing with a portfolio manager.
Even if you’re retired, it can be worthwhile having some of your portfolio invested in these types of assets.
4. Make your own income
You can make your own dividends by selling the portions of your shares that have climbed in value. While you don’t receive any franking credits, you don’t have to pay tax on your gains if you’re in your pension phase (inside of super).
5. Think about the cost
Staying in cash offers the comfort of certainty. But it will cost you when it comes to returns.
Only investing in cash will give you a return just over 3 per cent. Upping your growth exposure to 50 per cent will mean a return closer to 6 per cent. (This assumes you get 3.2 per cent on your cash and 8 per cent on your growth investments including dividends and capital gains).
If you and your partner want your $600,000 to last 20 years the difference between the two is a payment of $9,000, or $170 per week. Or you could think about it this way - only investing in cash will cost you $170 per week, every week, for twenty years.