What savers can do in the face of falling interest rates

If the economists and analysts are correct, this week we’ll be looking at another interest rate cut from the Reserve Bank. Millions of Australian home owners will feel relief on an expected 25-basis-point, but spare a thought for those who rely on the yield of cash assets to fund their retirements. If the cash rate drops to 3% they’ll be left to wonder how far the cash rate will fall in 2013 and whether they can live on these decreasing yields.

The average interest rate on bank deposits and term deposits was 3.5% at October 2012, according to the RBA.

If we agree that underlying inflation is running at around 2%, those living on cash yields are already vulnerable, before even this week’s supposed rate cut.

But depositors have one thing going for them: the banks need their money because it is cheaper than sourcing it from the capital markets. So the banks will compete for those deposits with good rates. You just have to be prepared to look and to act.

I’d start by being active about where your money is and how much it is earning. Make a habit of reading financial media and going to comparison sites such as Canstar or RateCity. Some of the best term deposit rates are 90-day deposits that turn over four times a year. So it pays to be more active.

If the rate offered on your savings account is dropping, look for higher paying alternatives. Don’t worry about having to leave the comfort of your own bank, because your bank may already offer a higher yielding money market account that goes by a name you are unaware of.

There are four main categories that cash investors can use.

Savings accounts: They pay low rates that are variable, have transactional capability at ATMs and branches, and are capital-guaranteed by the government.

Cash management/savings maximiser accounts: They pay higher rates than savings accounts but are also variable; they often lure people in with "honeymoon" rates for four to six months, are commonly online-only; they usually have rules about how many deposits/withdrawals each month, limiting their transactional capability. Also capital guaranteed by the government.

Term Deposits: They pay higher rates than savings accounts (Westpac’s 90-day TD is 4.3%; ING’s 180-day is 4.5%); they are fixed rate and fixed term, so you have no flexibility to withdraw the money during the investment period, but they are capital-guaranteed by the government.

Bond funds: They invest in the corporate and government bond markets, earn higher than TD yields, with very low risk; they pay retrospectively variable rates (same as a managed fund).

Investing in bonds is very low risk and produces yields well over 5%.

Your best way forward is to see an adviser. But if you can’t, commit to being more active with your cash investments and to become an expert on yield.

You can’t control interest rates, but you can decide where you money is invested.

If you’re a retiree or pre-retiree who is concerned about what will happen with your savings, I want to hear from you. Email me.

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.