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Retirement Planning

What Further Reductions In Interest Rates Mean To Retirees

 

The lowering interest rates have been giving depositors a tough time, and with rates looking to be reduced even further, the pain will continue to get worse for depositors.

 

Many retirees retreated to the safe haven of cash when the global financial crisis hit 3 years ago, many locking in interest rates of 7-8% return.

 

However with term deposits now maturing retirees are finding interest rates which are very unattractive. Interest rates have fallen 1.5% in the past year to today’s official cash rate of 3.25%, and indicators are pointing towards a further 1% fall by the second half of 2013.

 

Not only do term deposits stifle capital growth for retirees, in fact there is no capital growth with term deposits, but with the prediction of further rate cuts retirees must consider more sophisticated strategies rather than just living off term deposits.

 

Invest for Income

 

All retirees should have a ‘diversified and balanced portfolio’ of investments. This is not to say that term deposits do not have a place in a diversified and balanced portfolio, but that they must form part of a portfolio of investments which will promote both income and capital growth to retirees.

 

A ‘diversified and balanced portfolio’ is one that generates income not just from fixed interest but also from shares (bank stocks, for example), property investments and cash deposits. This sort of diversification means that over a 20+ year period of time the cash return should stay fairly consistent over time.

 

The last thing a retiree should be doing is chasing the market for the next ‘hot’ asset class. This will usually lead to the same outcome as a dog who chases its’ tail – not really getting anywhere in the long run. Yes, it is true that occasionally a dog can catch its’ own tail, but in the human world that is equivalent to me winning the $50million dollar Lotto. It’s not likely to happen, but I could get lucky.

 

There is no one simple product which can give retirees the same level of risk as a term deposit, and therefore it is important that retirees seek advice from a qualified and experienced financial advisor who will point you in the right direction to help you:

 

 

Paul Baggetta, Founding Partner of Baggetta & Co, has been a Taxation Accountant for over 31 years, a qualified Financial Planner since 1999 and in 1983 qualified as a Real Estate Licensee and holder of a Triennial Certificate.

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