Keep the Cash Flowing

Buffeted by low returns and volatile sharemarkets, retirees need new strategies to secure a comfortable lifestyle.

- Susan Hely

Could this be the worst time to retire? Retirees are in a bad place. The official cash rate is at a record low of 1.5%, term deposits are paying around 2.5% and long bond yields are 2.8%. Australian equity markets continue to move sideways, although dividend yields are still healthy at around 5.7%, including franking credits, as are rent-collecting property trusts. Lower-yielding global sharemarkets have been very strong over the past year but there are concerns about the expensive US market.

“We are going through a period of low yield and it is going on for much longer than what people thought,” says Andrew Boal, regional head of Australasia at Willis Towers Watson and convenor of the Actuaries Institute’s superannuation practice committee.

All this means that if retirees want the same return on their savings they were getting 10 years ago, they need a different investment mix. A decade ago retirees could comfortably invest 40% of their portfolio in fixed income and double what they get today from bond yields. “Future returns [from fixed income] are likely to be lower and more volatile,” says Sam Morris, investment specialist at Fidante Partners.

These days retirees need to take on more investment risk for a decent return. Healthy, repeatable investment income is available but the values of these high-yielding assets are volatile.

Certainly leaving your money in cash means you are going backwards. With the Reserve Bank expecting inflation of around 2% over the next year, the after-tax return from your cash isn’t keeping up with the cost of living. If you have a large slab in term deposits paying 2.5%, the net return is 1.3% if you are on the top marginal tax rate. But this is below expected inflation. If you are investing through your super fund you are marginally ahead in real terms, but only just.