Although the Reserve Bank of Australia (RBA) has left the cash rates unchanged, retirees might still face a hard time trying to maintain their quality lifestyle by relying on yield on cash and term deposits, Plato Investment Management said.
This was because the interest generated on savings which were put in overnight cash, one-year term deposit or 10-year bonds, was still less than the rate of inflation of goods and services, Plato’s managing director, Don Hamson, explained.
“So, the way things stand, by holding cash or investing in cash-backed assets for a year, at the end of the year you’ll have less buying power than at the start of the year and we are still anticipating another rate cut, which will drive these real interests further into the red,” he said.
On top of that, some income-related products, including income securities and bank hybrids we re-priced at a margin to bank bill rates, and with 90-day bank bill rates falling below 1%, these incomes were already crimped.
Hamson noted that investors’ that continued hunt income saw increased retail inflows into income-focussed investments as they were shifting away from ‘safe’ cash to riskier assets such as equities, non-government debt, property or infrastructure taking on more risk.
“The risk for these investors is that they switch to riskier assets after those assets have risen substantially in value, and possibly before they may take a fall. Having said that, we believe it is difficult for asset value to fall significantly given the expectation that very low interest rates are likely to be around for a considerable period of time,” he added.