Interest rates impact your retirement income
Financial Planning | 29/01/2021 |
7 min read
Low interest rates have helped fuel Australia’s economy for the past decade. While that’s proven a boon for property investors, it’s also made it harder for pensioners to earn an income on their superannuation savings.
The Reserve Bank lowered interest rates to a record low of just 0.10% in November 2020. If you prefer low risk investment options like Cash and Fixed Interest, the low rate may not be enough to keep up with inflation.
With interest rates expected to remain low for the foreseeable future, it may be time to re-evaluate your investment strategy. Here’s how to get started.
What is lifecycle investing?
Lifecycle investing means adjusting your financial risk to suit your life stage. So, while you might opt for an aggressive mix of super options in your 30s and 40s, as you approach retirement, you’ll probably start looking for safer options that aren’t as likely to see dramatic shifts up or down.
For most retirees that means opting for Cash and Fixed Interest investments. And while that was an effective strategy when interest rates were higher, it might not be as effective these days. That’s because low interest rates impact the returns you receive on your Cash or Fixed Interest options, and these returns may no longer be enough to keep up with inflation, or the income that you were expecting to see from your super balance.
Understand your income needs
If you’re retired, your superannuation returns don’t exist in a bubble. For most people they’re part of a broader income stream that might include the Age Pension, other investments and perhaps some part-time work. How all those elements fit together and how much money you need to maintain your lifestyle varies from person to person.
One thing you need to keep in mind is drawdown rates. This is the minimum amount that you need to withdraw every year if you have an account-based pension. Annual drawdown rates were halved in March 2020 (from 4% to 2%) because of the coronavirus impact on investments. In other words, the amount of money that you have to withdraw from your super pension account balance every year was cut in half. The new drawdown rates will apply in the 2019/2020 financial year and 2020/2021 financial year.
These changes were made to protect balances that may have been reduced due to coronavirus related drops in the market. But they don’t address the underlying problem of low returns.
Reassess your risk
An account-based pension is a great way to hold your money in retirement, because there’s no tax payable on either income or capital gains in the account. And if you’re a cautious investor you can hold your account based pension money in lower risk investment options like Cash or Fixed Interest.
But if you’re finding that traditional low-risk investment options aren’t delivering the returns you need, you can look for higher returns in other investment options. However, higher returns can mean higher risks and the potential for loss at some stage.
For reference, you can view different investment options and their corresponding returns here.
If you’re supporting your retirement with a full or part Age Pension, you'll want to make sure you’re receiving all your entitlements. And as your superannuation income shrinks as time goes by you may be eligible for increased Age Pension payments, which can help offset any decreases in other income sources.
Aside from Age Pension payments, you may also be entitled to additional benefits including an energy supplement, carer allowance, and rent assistance. In other words, it pays to check in with Centrelink to ensure they’re assessing your income and assets correctly. This is something a financial planner can assist with, and you can learn more about our financial planning services here.
Consider your super options
While Cash and Fixed Interest investments have been the go-to options for many retirees in the drawdown phase of their super, the ‘search for yield’ has seen people look further afield to maintain their income.
So if you’re finding that the return you’re seeing on your super isn’t keeping up with your expectations it may be time to speak with a professional.
Our financial planners can assist you with income options in retirement, and how to structure your assets in a way that provides both financial security and a lifestyle you can enjoy.
You can book an appointment today by completing an online form or calling us on 1800 682 626.
Any figures quoted are correct at the time of writing but may be subject to change.
This information is provided for general information only. It does not take into account your personal objectives, financial situation or needs and should therefore not be taken as personal advice. You should consider whether it is appropriate for you before acting on it and, if necessary, you should seek professional financial advice. Togethr Trustees Pty Ltd ABN 64 006 964 049, AFSL 246383 ("Togethr") is the trustee of the Equipsuper Superannuation Fund ABN 33 813 823 017 ("Equip" or "The Fund"). Past performance is not an indication of future performance.
Togethr Financial Planning Pty Ltd (“TFP”) (ABN 84 124 491 078, AFSL 455010), trading as Equip Financial Planning, is licensed to provide financial planning services to retail and wholesale clients. TFP is owned by Togethr Holdings Pty Ltd (ABN 11 604 515 791). You can obtain the TFP Financial Services Guide and/or Privacy Statement by contacting our Helpline on 1800 682 626. This is general information only and does not take into account your personal objectives, financial situation or needs and therefore should not be taken as personal advice.