What do low interest rates mean for retirees?

Tim Falk 19 August 2016

interest rates

With interest rates at a record low, savings accounts may not offer the returns Australians need for a comfortable retirement.

On 2 August 2016, the Reserve Bank of Australia sliced another 0.25 percentage points off the official cash rate, leaving it at an all-time low of 1.50%. While this led to a very welcome reduction in mortgage repayments for many Australians, it was bad news for many Australian retirees.

As the banks passed on rate cuts to many of their savings accounts, the steady returns offered by term deposits became even more attractive. In order to raise the money they need to fund a comfortable retirement, many Australians will have to look elsewhere for investment opportunities that provide the potential for higher returns.

Why are interest rates so low?

When he announced the August rate cut, the second cut to interest rates in 2016, Reserve Bank Governor Glenn Stevens outlined the reasons behind the decision to drop interest rates. While in the past the RBA has believed that lowering rates would spark more growth in the housing market, this is no longer the case.

Instead, the aim of the rate cut was to stimulate a stagnant Australian economy. The belief is that stronger economic growth is essential to getting inflation back into the RBA’s target range of between 2% and 3%.

Unfortunately, the rate cut was bad news for Australia’s self-funded retirees, not to mention anyone else with money in a savings account. Many Australian banks, building societies and credit unions were quick to pass this interest rate drop on to their high-interest savings accounts, reducing the interest-earning power of savers across Australia.

Was the rate cut passed on to all savings accounts?

Many popular savings accounts were hit by the most recent rate cuts. ING Direct lowered the interest rate on its Savings Maximiser account by 0.25%, while Bankwest’s TeleNet Saver, RaboDirect’s Premium Saver and ANZ’s Progress Saver all suffered 0.25% cuts as well.

However, not all accounts were hit by the rate cut. Some, such as the UBank USaver Ultra Bonus Account, actually saw a rate increase. Check out our full list of which banks passed on the rate cut for more information.

The RBA’s announcement was also followed by some very interesting news regarding term deposits. The major banks made headlines when they announced that they would raise term deposit interest rates, in most cases by 0.55% or more. This was excellent news for retirees, allowing them to access at least some steady returns to fund their retirement by investing their money in a term deposit account with a competitive interest rate.

What does a low interest rate environment mean for retirees?

Despite the good news surrounding term deposits, low interest rates still represent a very big problem for retirees. Since 2011, Australia’s retirees have been hit by 12 rate cuts that have substantially reduced the interest-earning power of their savings accounts.

For example, if you opened an ME Bank Online Savings Account in 2012, you could have earned a standard variable rate of 4.25% p.a. Today, the base variable rate on offer is just 1.30% p.a.; you can earn a bonus interest rate by satisfying specific terms and conditions, but the noticeable drop in the earning power of high-interest savings accounts is plain to see.

What these continued rate cuts mean is that keeping your money in a savings account is becoming much less of a desirable option for retirees. As the return on the money you invest continues to drop, savings accounts simply cannot offer the solid and steady returns they once did.

As a result, Australia’s retirees are looking for investment opportunities that provide the potential for higher returns, for example, shares, property and bonds. Unfortunately, with the potential for bigger gains also comes an increased level of risk, so at a time in life when most people prefer to adopt a conservative and reliable investment strategy, retirees are forced to expose themselves to the possibility of investment losses.

What options are available to retirees?

If your savings account has been hit hard by repeated interest rate cuts, there are still plenty of options available to help you maximise your savings. The first and most obvious option is to invest some of your funds in a term deposit. The decision by the major banks to increase term deposit rates following the RBA rate cut is excellent news for retirees, so taking advantage of the safe and consistent returns offered by these accounts while you can is a good idea.

However, there are plenty of other ways you can earn an income in retirement, and investors are increasingly moving away from savings accounts as they search for higher yield. One option worth considering is choosing to invest in some “sensible” shares with a history of paying sizable dividends. This allows you to draw an income from the regular dividend payments, and if you invest in blue-chip stocks you can hopefully avoid the fluctuations that hamper more volatile shares.

Fixed income securities such as bonds offer another investment option well worth considering. For example, you could purchase a bond that pays a defined interest rate and then trade that bond on the open market. This has the potential to offer far greater returns than term deposits, but also comes with a higher level of risk. However, bonds generally aren’t considered as risky as trading shares.

Property is another option for retirees turning their attention towards riskier investments, but it’s essential that you know exactly what you’re getting yourself into before you commit to buying an investment property.

Top tips for retirees

There are several other steps self-funded retirees can take to help maximise their earnings in a low interest rate environment. These include:

  • Reviewing your investment strategy. With interest rates at record lows, now is the perfect time to review your investment strategy and consider all the options available for maximising your returns. This could include investing in term deposits, stocks or bonds, or even choosing a fixed term annuity that pays a regular income.
  • Access benefits. Do your research to find out whether there are any benefits or discounts you may qualify for. For example, are you eligible for any financial assistance from the government such as the age pension, or are you able to access special seniors discounts on goods and services (for example utility bills) to help your money go further?
  • Cut back on spending. Hopefully your retirement is a time in your life where you can afford to enjoy yourself and live in complete comfort. But with rates so low, it makes sense to give your budget a once-over and work out whether there are any areas where you can cut back on spending. From cancelling club memberships you no longer use to putting a little bit more effort into shopping around for the best deal, there are plenty of ways you can tighten your belt.
  • Don’t over-reach. The search for higher returns can make you consider investment options you otherwise may never have thought twice about. With this in mind, remember to be sensible and thoroughly consider all your options before making a decision. Retirement is not the time to take on an unacceptable level of risk and face severe financial consequences.
  • Get expert advice. Perhaps the most important thing you can do is make an appointment with a financial adviser that you trust. An adviser can assess your financial circumstances and your appetite for risk and then recommend the best investment strategy for you, ensuring that low interest rates don’t turn the retirement you’ve been dreaming of into a nightmare.

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