CASH CRASH WARNING

Interest rates on savings are only going to worsen, writes Anthony Keane

AN income crunch hurting retirees and young savers will get worse before Christmas.

Interest rates paid on term deposits have plunged more than three quarters – from 6.5 per cent to 1.5 per cent – since 2010, and people who rely on cash savings are being warned to be careful about chasing higher incomes.

The Reserve Bank of Australia last week left its official cash rate on hold at a record low 1 per cent, but economists say more cuts are close.

The RBA has just three monthly board meetings left this year, and AMP Capital head of investment strategy Shane Oliver said he expected 0.25 per cent rate cuts at two of those meetings.

“It’s going to continue to get pretty tough for retirees and others relying on income from bank deposits,” Dr Oliver said.

“I think the alternatives are quite simple, but they’re not nice. If the investor is more concerned about income flow and not so worried about volatility in their underlying investments, then they are better off going with shares.”

Dividend yields from Australian shares were currently 4.5 per cent, plus more than 1 per cent from franking credits, Dr Oliver said.

“But as soon as you move away from bank deposits you take on more risk,” he said.

“Consider your options and think deeply about what is most important – is it income flow or absolute security of the value of your assets?”

KPMG chief economist Brendan Rynne said he expected one RBA rate cut before Christmas, and another possibly early in 2020.

Banks might also reduce their savings account rates further to try to preserve their profit margins, Dr Rynne said.

Many retirees, burnt by the Global Financial Crisis of 200809, now keep all their money in cash deposits because the money is government guaranteed. “Returns for those people are going to get more squeezed,” Dr Rynne said.

Some might receive extra age pension payments but others wouldn’t, he said.

“If chasing yield, some people may not fully appreciate the risk-return trade-off.”

Aussie shares are already trading near record highs, partially because of demand for their high dividend yields.

Midsec adviser David Middleton said his firm was “sensing danger” that people were swapping their cash deposits for shares.

“Perhaps it’s time to focus a little more on preserving capital rather than seeking a little extra income,” he said.

Advisers often recommend retirees have a cash “bucket” holding three-to-five years of their living expenses, and invest the rest in a diversified range of growth-focused assets.

Mr Middleton said he was one of the “long-term bucket people”.

“We believe strongly in the idea that in a crash you only lose money if you sell, and you only sell because you need the money or need the sleep,” he said. “Have plenty of liquid assets so you can ride it out.

“Patience costs nothing.”