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Funding Retirement Income In A Low Interest Rate Environment

While a traditional bank deposit is generally regarded as one of the safest forms of investment, it also currently offers amongst the lowest returns. For those relying on bank deposits to fund their retirement income, the current record low interest rate environment offers little reward.

For those approaching retirement, low interest rates could mean having to rethink their retirement goals, retirement timeframe and potential sources of retirement income. For existing retirees, it could mean having to re-assess their goals. Simply put: low interest rates means more capital is required to fund future income needs.

This raises the question – if interest rates stay low for the foreseeable future, how can you fund the retirement lifestyle you’d hoped for?

Regardless of whether you are preparing for retirement, or are already retired, the answer lies in focusing on factors you can control, rather than those you cannot. Whilst there are many aspects of investing that can’t be reliably predicted, there are many factors you can control, including:

For those still working, it could mean adjusting discretionary spending, so that more funds can be used to boost retirement savings, or additional mortgage payments can be made to reduce the amount owing, or a combination of both. Less spending now means more money for later.

For self-funded retirees, it could mean adjusting discretionary spending by taking fewer ‘big’ holidays or by considering the Age Pension in their future planning.

Inevitably, investors may feel compelled to move further along the risk curve to seek out the retirement income they desire. In other words, they may seek to diversify away from cash and invest a higher percentage of their capital in alternative forms of income producing assets – such as shares, property and infrastructure. This is often referred to as the ‘search for yield’.

Cash vs Alternative Income Assets

The cash rate in Australia is currently 1.50%, with some institutions offering around 3.00% depending on the deposit amount and timeframe. Compare this to shares, where it is possible to receive a 6.00% return (or more), often with the benefits of franking credits.

There are, of course, risks associated with growth assets that can’t simply be ignored, and investors need to feel comfortable that the value of their portfolio will fluctuate over time, as the assets respond to prevailing market conditions. Whilst a regular dividend can help to offset the impact of any future share price falls, there is no guarantee that dividends will continue to be paid at the same rate.

Managing investment risks can be achieved by:

Structuring your Assets

The overall structure you employ is the foundation to your portfolio and impacts the net return you receive. Quality assets, poorly structured, can lead to lower real returns.

For self-funded retirees, the decision to hold assets via a super fund or account based pension, or in their individual names can lead to very different results, in the form of:

Understanding the difference between structures, and how these relate to you, can be complicated as they relate to an individual’s personal circumstances. This is one area that is definitely not “one size fits all.”


The fees you pay, whether direct or indirect, will also impact the net return you receive and can make a significant difference over the long term. Fees can generally be categorised into three areas:

It is important to have a good understanding of the total fees you are paying, to be satisfied that you are getting “value for money.”

As outlined above, it is clear that there are many factors to consider when it comes to deciding which approach is best for you. Now, more than ever, due to the current low interest rate environment, it’s worth reviewing your overall position to determine whether your current strategy remains relevant to your needs and lifestyle. Please contact your financial adviser to discuss your particular situation.

Source: Capstone.

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The information provided on this website, including the material and contents provided in the website publications, are informative in nature only and you should not act specifically on the basis of this information alone. It should not be used as a substitute for legal, business, accounting, tax, financial planning or other professional advice. If expert assistance is required, professional advice should be obtained. Liability limited by a scheme approved under Professional Standards Legislation

Paul Baggetta is the Founder & Principal of Baggetta & Co (ABN 68 786 233 813).

Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.

Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.


Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.