Risk vs reward: Dilemma for retirees in low-interest world

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Opinion

Risk vs reward: Dilemma for retirees in low-interest world

With interest rates at historic lows, investing to generate enough income to fund a comfortable retirement has become a major challenge for many retirees.

No longer can you park your cash in a fixed-interest term deposit and sit back and enjoy the ride.

Longevity risk is an issue which many retirees face.

Longevity risk is an issue which many retirees face. Credit: Getty

Term deposits generally offer the most competitive interest rates for people prepared to lock their cash in the bank for a set period, but those rates have crumbled in recent months.

Finding a rate above 1 per cent is now problematic. Commonwealth Bank has cut its best term-deposit interest rate to 0.95 per cent and other rate cuts are in the pipeline, experts say.

Retirees are facing lower interest rates for the forseeable future, with economic forecasts expecting a slow and prolonged recovery for the Australian economy post COVID-19. Still, many have not yet trimmed back expectations for their investment returns – and income.

While investment income of 5-7 per cent a year have long been the norm, that's no longer the case.

With savings rates of less than 1 per cent and company profits hit by the pandemic, how realistic is it to expect those returns to be maintained?

Australia's sovereign wealth Future Fund has delivered enviable returns averaging 10 per cent a year over the past decade, boosted by the fact it pays no tax.

However, the fund has slashed its expectations in half, with chairman Peter Costello saying it will be hard to generate future returns of the inflation rate plus 4-5 per cent.

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For smaller investors, it will be a battle to match anything like that target for the forseeable future.

If you are suffering an income squeeze, it may be time to think long about moving a portion of your cash away from safe-haven term deposits and into other asset classes that offer better investment performance, such as shares or government bonds.

However, the search for higher returns also brings with it additional risks. It's a matter of weighing up how much threat to your capital you are prepared to take to maintain current retirement income. If you are someone who has always parked their cash in a bank and never had to bother about risk, this is a major change.

If worrying about the market's volatility keeps you awake at night, it might be time to change tack and leave your investment decisions to the experts.

Investing in an Australian Securities Exchange listed managed fund, an exchange traded fund or an annuity might be a viable alternative to deliver the sustainable income you need.

Research shows that more than half of Australians fear outliving their retirement savings.

Purchasing an annuity can remove some of that longevity risk by providing guaranteed regular income for your lifetime, regardless of how investment markets perform or how long you live.

The most important thing is you are not alone in your investment dilemma. Speak with a financial adviser about your income needs and work out what best suits you and your personal circumstances.

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