CASH CRASH WARN­ING

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

The Western Star - - Money Saver Hq -

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.”

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