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Experts now predict there is "no chance" interest rates will recover from record low levels as a result of drastic cuts by the Reserve Bank, and while that may be good news to mortgage-holders, it has forced people like Ollie Price to take drastic action.
Key points:
- Interest payments form a key income stream for retirees
- But as rates are cut close to zero, those income streams are drying up
- Retirees are now being forced to consider riskier assets, or selling their homes
The retired Perth lawyer and golf enthusiast has recently embraced what many investors regard as a financial bunker — gold — and invested 20 per cent of his savings in the precious metal.
Mr Price said his decision was driven by the extremely low interest rates available on term deposits with the major banks.
"You read a lot about spreading your wealth around the place — not that there's much, but you do want to preserve it as much as possible," he said.
"That seems to be the most prominent thing in my mind at the moment … not making any profit, but just making sure I don't lose what I've got."
The paltry returns available on cash deposits — the result of a global downward interest rates trend — are putting many self-funded retirees in a bind.
Data from financial comparison website Canstar shows the average 12-month term deposit rate was 1.38 per cent in December — less than half the rate of 3.22 per cent recorded at the same time five years ago.
The Reserve Bank of Australia's decision to cut the cash rate three times in the past 12 months has amplified the financial stress already faced by some retirees, according to Janice Ricks, director of the WA division of the Association of Independent Retirees.
"The interest rate that we used to get virtually offset how much we had to withdraw from our super funds," Ms Ricks said.
"People are sort of looking to see really where on Earth can they put their money?
"They're eroding their capital at a much faster rate than they anticipated … which, of course, probably means that we'll be part-pensioners as opposed to fully self-funded or even partly self-funded."
Term deposits rates hit harder than cash
About 3 million Australian households rely partly or completely on income from term deposits "to maintain their lifestyle" according to Martin North, principal of Digital Finance Analytics (DFA).
Over the past five years, term-deposit holders tended to receive lower returns than the Reserve Bank cash rate, Mr North said, with deposit rates leading the central bank rate down.
"Many of those [deposit-holding households] will have other assets too, but quite a few won't," he said.
"Many people aren't prepared to take … higher risks, so what they're tending to do is just throttle back their spending and throttle back their lifestyle to fit it within the lower returns that they're able to get.
"There's going to be a point, with rates going continually lower, that that won't be possible."
'No chance' rates will recover
Mr North said there was a split between households willing to invest in riskier assets, such as shares, and those who "manage to survive on much lower rates".
"The problem … is that if you look at the UK, they went through this journey some years ago — this is a long-term, one-way direction," he said.
"There's no chance, in my view, that rates will come back up again and what that essentially means is that many households will be under severe financial pressure for years ahead.
"The people who have 20 or 30 years of retirement ahead of them are those perhaps under the most pressure now, because they will be seeing lower returns for a long period of time."
Canstar's Steve Mickenbecker said the interest rate challenge faced by retirees was "unprecedented", with many economists tipping the RBA to cut the cash rate by another 25 basis points in February.
"A lot of retirees have moved to that dividend imputation strategy, where you invest in stocks that have high-dividend yields," he said.
"That works fine, provided the market doesn't crash.
"People are having to take on more risk and are obviously feeling a little bit nervous about it."
Call for lower deeming rate
With interest rates forecast to remain at, or exceed, record lows, self-funded retirees are looking for financial protection through other sources, including government policy.
Last month, WA Self Funded Retirees Incorporated (WASFR) made a pre-budget submission to the Federal Government outlining nine recommendations to improve the financial position of its members.
Among the recommendations was a call to lower the deeming rate — the assumed return on a person's financial assets, which is used by the Government to determine pension eligibility — to 2 per cent.
Currently, single retirees are presumed to earn 3 per cent per year on financial assets of more than $51,800 (a rate of 1 per cent applies on savings up to the threshold).
For couples, the 3 per cent rate applies to combined financial assets worth more than $86,200.
WASFR president Ron de Gruchy said the deeming rate should follow the RBA cash rate, as it has in the past.
"Basically, it means that if you've got a banking term deposit and you're getting 1.6 or 1.7 per cent, but the Government deems your income to be 3 per cent, well you're out of pocket," he said.
"You are being denied access to a part-age pension and over a period of years it banks up to quite a bit."
Other self-funded retirees, like Ms Ricks, wanted the Government to consider supporting alternative investments for retirees, such as an infrastructure bond with a rate comparable to the deeming rate.
"I would think that quite a lot of pensioners would take that up," Ms Ricks said.
Selling the family home sooner
It is a concept that has the support of Mr North.
"My own view is that there is definitely … room for some sort of infrastructure-related bond that would potentially [deliver] slightly higher returns," Mr North said.
"We have a lot of savings at the moment going offshore seeking higher returns than in Australia and, in a way, that's a problem because we need those investments here rather than overseas."
But many retirees may prefer to cash in their assets earlier than intended, according to University of Western Australia economist Ishita Chatterjee.
"They may have to sell their house at a price which is much lower than what they had been anticipating it to be [and] sell it faster," Dr Chatterjee said.
"Because maybe … house prices will go up again for them, but maybe they don't have 10 more years to wait."
Topics: consumer-finance, business-economics-and-finance, banking, older-people, community-and-society, perth-6000, wa