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Interest rates limbo: How low can they go?

Central banks around the world have been cutting interest rates hard during the COVID crisis.  According to the 2020 Natixis Global Retirement Index report, there were 173 interest rate cuts worldwide between January and July this year.

That’s good news for young people with mortgages and car leases, but it’s presenting real challenges for retirees who are trying to live off their savings.


All around the limbo world

It makes sense.  Interest rates are the go-to tool for central bankers trying to stimulate their economies and get commerce moving.  The economic impact of COVID has been sudden and severe.  Globally, this is the worst recession since World War II, and international unemployment is at its highest level since the 1960s. 

The trouble is, interest rates were already structurally low.  Around 12 years ago we were fighting the Global Financial Crisis, when governments sharply cut interest rates.  Those low rates were mostly still in place when COVID hit.

Here in Australia, our official interest rate sits at an all-time low of just 0.25 per cent.  While we wait to see what stimulus measures are announced in the Federal Budget, it’s clear the Reserve Bank has not ruled out even further cuts.  

It’s unlikely, but it’s possible interest rates can go negative.  Keep in mind as far back as 2014, the European Central Bank introduced negative rates in an effort to stimulate the European economy.

Even if interest rates aren’t cut further in Australia, it’s likely they will remain at record lows for several years, presenting real challenges for retirees.


Bend back like a limbo tree

The record low interest rates mean record low bond yields and record low returns on cash and term deposits.  Compounding this, there hasn’t been a worse time in history to convert your super to a lifetime annuity.

Retirees are now finding it impossible to live off the income provided by their savings.  This leaves them with two options: reduce expenditure or invest with more risk.  Understandably, most retirees are willing to cut back on their expenditure for a while, but not for the long-term.  

Unfortunately, in their chase for yield, sometimes retirees don’t realise they’re taking on more risk.  But be wary of schemes promising high yields and low risk.  In the current environment that’s simply not possible, as hundreds of retiree investors in Mayfair 101 have found out to their dismay in recent weeks.


You’ll be a limbo star

The good news is that there is another way.  If retirees can change their thinking, there is a way they can improve their cash flow and still manage their risks. Taking a total portfolio view means retirees focus on their total returns, not just the income our savings provide.  If we can take a structured approach to selling down our investments when we require capital, there can be money to live on today, and still enough for the future.

At When Financial Solutions we can help you build a retirement portfolio that sets aside the money you need in the next few years and invests the rest for growth.  If you choose an active relationship with us, then we can review your progress from time to time and judiciously rebalance your growth assets as required.  In this way, you can avoid selling your growth investments when prices are low.

It’s a way that you can meet your long-term responsibilities without going without today.  When you partner with us, it’s not a matter of ‘if’ you will have income in retirement but ‘when’.


Michael Bowman and James McMaster are co-founders of When Financial Solutions.  This article is general and does not consider your personal circumstances.  If you would like advice specific to you please give us a call.

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