Low interest rates to put terrible pressure on retirees

When the RBA dropped the cash rate to 3.25% almost three weeks ago, mortgage holders were happy, but retirees and savers missed out.

While mortgage holders stood to save about $38 a month on a $300,000 variable rate loan, there are numerically more Australians saving their money and relying on the yield from those savings than there are people borrowing for a home loan.

The people who have their money in cash savings products are relying on interest rates to sustain them. But the Reserve Bank wants to stimulate the economy so it reduces the cost of money to get people to borrow and spend.

The current situation is poised to create terrible pressure on retirees and those close to retirement, because most economists expect inflation to rise again. Inflation is currently low (around 2%) but its average since 1983 is really 3%.

Economists know that inflation always comes back to trend, and when it does it will be in this context: the online savings accounts, bonus savers and term deposits are yielding in the range of 3% to 4.5%.

So if inflation comes back to around 3% – at time when the RBA is still holding the cash rate around 3% – then the safest forms of saving are not going to produce the income that retirees need.

The first thing to do is assess whether you are getting expert advice. If you have an adviser, call and tell them that you don’t want to be caught between rising inflation and a falling cash rate, and schedule an appointment.

If you’re DIY, then you have to start searching for cash products that take you up the return curve while not taking you too far along the risk axis.

If you want the high yields, you will be typically looking at bank term deposits and online savings accounts, which are safe and can earn up to 2.5 percentage points over inflation.

There are tricks to these. The online “bonus” savers often pay their high rates for the first four to six months, or they punish you for taking money out in any month, or they punish you for not putting money in.

Terms deposits are more straightforward in the rates they pay, but they are inflexible.

Into this environment are creeping high-yield “hybrid” products, some of which are offering yields of 7%.

They seem to be products of the cash variety, but many of them include equity features that expose you to loss.

The problem with these investments that look like cash – but are not really – is that the yields are variable and there is a risk of losing your capital. At which point, you are missing out on the main benefit of a “cash” investment: the safety of it.

There are good cash products with high yields in the current market – do you homework and make sure you know what you’re investing in.