How Should Savers Be Responding To Low Interest Rates?
The answer is simple: invest in stocks over bonds or savings accounts.
But that’s an incomplete answer. As we age, experts advise us to shift our investments over time, with less in equities and more in bonds. So, when journalists report about potential increases in interest rates as bad news, they fail to recognise the very real impact that the historically low interest rates have on older savers and retirees trying to make sure their savings lasts for their lifetime.
The fundamental concepts of investing are based on balancing risk and return. But is our government’s policy, monetary or otherwise, by driving down lower-risk returns, trapping older investors into abandoning the advice imposed on them and obliging them to stay invested in risky assets? And to what extent is this artificially keeping the stock market high?
It might be convenient to say that Australians are savvier by taking advantage of higher returns in the stock market. But how many financial experts will, if/when the market crashes, simply reprimand older investors who felt they had no choice but to stay in the stock market? There are no easy answers, but the effect of seemingly permanent low interest rates on older savers cannot be ignored.
Capital growth investments, such as property and shares, can rise and fall in value. But over the long term they usually outperform other types of investment. This makes them important for increasing the time your savings will last. The effects of low interest rates are pushing the prices of growth assets, like shares, higher. Just because interest rates are low, you don’t have to lower your retirement expectations – as long as you explore your options and do some planning.
If you’ve had a variable mortgage in recent years, then you would’ve appreciated the fall in rates. But as an investor, low rates are hurting the cash portion of your super savings.
If you haven’t already retired, you might be finding it harder to generate your desired level of cash flow from your income-producing assets. And, if you’re yet to retire, low rates may be holding your super back from reaching the balance required for a comfortable retirement.
In the year of covid-19, the official cash rate was cut to 0.1 per cent by the RBA and they have it will stay there until 2024. Now the big banks will give you roughly 0.35 per cent to lock up your money for 12 months. And many of them give a special 12-month deposit rate of 3 per cent to 18-29 year olds.
For young and first home buyers and families burdened with large mortgages it is the best of times and they are putting that hope to work by pushing up house price to record levels. The home buying power of most people has doubled in a decade. And with the supply of housing tight, they are using it to get to the place they always wanted.
For retirees on the other hand, it is the winter of despair. It all comes down to risk and return. To get wages and inflation up, the RBA is doing two things. First, encouraging borrowers to borrow more or to spend what they save on interest, and forcing savers to take more risk.
Savers are mostly retirees. Why does the RBA want them to take more risk? Because theoretically that means more productive investments. They are mostly just collateral damage in the war against low inflation. They are in the way of the RBA’s efforts to get borrowers to spend and/or borrow more, the idea being that there are fewer retirees being impoverished and spending less than there are borrowers spending more. The RBA knows that the negative consequences of low interest rates disproportionately affect retirees, but believes they must bear this burden for the good of the economy.
References
[1] Forbes
[2] NAB
[3] Schroders
[4] ABC News
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