Investing For Retirement Just Got Harder: Where To Invest With Record Low Interest Rates

By Don Hamson | More Articles by Don Hamson

Investors, particularly Australia’s 3.8 million retirees and self-managed super-funds, should review their income-generating investment strategy in light of the Reserve Bank of Australia’s (RBA) third rate cut decision.

While beneficial to homeowners and people trying to buy a residential property, rate cuts also see Australian retirees receive less income from their floating rate income investment assets.

Even before today’s decision, interest rates had fallen significantly in Australia. According to the RBA, 1-year term deposit rates have fallen 70bp already this year, to 1.45% at the end of August. The 10 Year Commonwealth Bond yields have fallen even further, dropping from 2.32% at the end of 2018 to around 1% at the end of September.

With the latest Consumer Price index of inflation registering 1.6%, that means that interest rates are now negative in real terms from overnight cash through to 10-year bonds.

After inflation, not to mention taxes, this means investors in safe assets like bank term deposits are going backwards!

Retirees living off cash-linked income are already struggling to make ends meet and this cut will further crimp their income. Many income-related products, like income securities or bank hybrids are priced at a margin to bank bill rates, and we have already seen 90-day bank bill rates fall more than 1% this year, which is already cutting their income.

Returns on cash, term deposits and products linked to bank bill rates are forecast to be cut even further.

So, it is very timely for retirees to reconsider their income generating asset mix. Thankfully, given the somewhat surprising election result, retirees can continue to bank on receiving franking credits from Australian share investments.

At a time when interest rates are hitting all-time lows in Australia, dividends paid by Australian companies have never been stronger.

Despite a lot of negative commentary around the recent August reporting period, dividends paid by companies we follow increased on average by 9% compared to the same time last year, with the median increase being 3%.

However, not all investors and retirees have benefited from this dividend bonanza. Many, retirees, need to reassess their income generating investments to ensure they are invested in the best possible income generating equites. Dividend increases, for example, have been largely concentrated in the resources sector, with traditional income stocks like the big four banks and Telstra either maintaining or even cutting dividends. Telstra has already cut its dividend by 48% over the past two years.

A cut in interest rates – while it won’t lead to an increase in dividend income – may lead to increased investor demand for dividend paying stocks, potentially raising the capital values of some.

Already, falling interest rate expectations have been the major driver of higher share prices in 2019.

We also welcome the Federal Government’s retirement income review. Retirement income offerings tended to be a one size fits all approach. With over five million baby boomers moving into retirement, the need has never been greater for new and innovative retirement income solutions for Australia’s retirees.

Plato is a leader in retirement income generation and highlights how active dividend investing can provide a regular income plus capital gain from the underlying share. Its listed investment company (LIC), PL8, is the only LIC to pay regular monthly dividends.

About Don Hamson

Don is the founding Managing Director of Plato Investment Management. He is well known as a leader in the practical application of after-tax investing. Prior to forming Plato, Don was Head of Active Equities, Asia Pacific at State Street Global Advisors.

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