Interest rate woes for retirees

14 Aug 2013

The recent interest rate cut may be wonderful for some, but what about the self-funded retirees relying on investments?

The cut

Last week, the Reserve Bank of Australia cut the interest rate by 25 basis points to 2.5 per cent, its lowest since 1959.

While this is great news for those entering the property market and those with a mortgage, how it affects retirees is another story.

Self-funded retirees

Put simply, lowering interest rates means cutting income for retirees who rely on interest earned from investments to make a living. This includes the loss of interest from superannuation funds.

Comparing the new rate to August 2008 when the cash rate was 7.25 per cent, people living off the interest from their savings have suffered a potential 65 per cent drop in their income.

For many retirees, their savings are in conservative investments, including cash. Every drop in the cash rate means another cut in their savings earnings and a cut to their incomes. This, coupled with the increase in living costs such as electricity, food and insurance has resulted in a double whammy for many retirees.

The rate cut also has an impact on the businesses around you. If you don’t have money to spend on life’s little luxuries, the businesses around you that you usually support will suffer as profits decrease. This is especially true in more regional areas and those areas known as sea or tree change regions where the population is mostly self-funded retirees.

What can you do to help?

For most retirees, the interest rate cut may mean altering the way you spend your money, especially when it comes to day-to-day spending. For some, luxuries such as overseas holidays are now on the backburner so that bills can be paid.

The effect on retirees does, however, depend on the rest of your portfolio.

Do you own shares? Are you entitled to a part-pension?

An alternative to cash and fixed interest is to put more investment in higher yielding shares. However, many retirees still remember being burnt by the Global Financial Crisis and with the GFC still fresh in their memory, may be reluctant to use this option.  

When it comes to the age pension, while it is a welcome source of income, it hardly affords the life of travel and luxury that many self-funded retirees are used to.

Looking ahead

Interest rates are tipped to continue to fall. While this may be devastating for those losing income, it could put retirees in a better position as it may allow you to buy assets at cheaper prices.

A possible road to take is investing in property. With interest rates down, paying off a mortgage is going to be an easier and quicker process. However, this is not a quick fix and largely depends on whether you are able to find tenants for your property.

Remember, while the latest interest rate cut can certainly impact on the quality of your retirement at the moment, markets move in cycles, so there is still hope ahead.

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