How safe are your savings?
Time to review your investment mix?
The saying goes that something is ‘as safe as a Swiss Bank’ But the recent forced bailout of Credit Suisse suggests this is a fallacy. Coming hard on the heels of three other major US bank failures, it’s spooked the stock markets and raised concerns for those with cash in banks around the globe.
Should you be worried?
Probably not. But it is a timely reminder to explore the pros and cons of cash as an asset class for retirees.
Is cash a good investment strategy?
Cash is often viewed as a ‘safe’ form of investment. It’s tangible – you can actually withdraw it in wads of notes, so it feels more ‘real’ than, say, shares or indexed funds. Theoretically your capital value will not go down – if you have $500 invested, then that is the amount of money you genuinely own. And given the current stock market volatility, whereby a shareholding worth $500 yesterday might the next day be worth $470, or $530, cash looks very stable. Other more speculative investments – for instance the roller coaster ride of Bitcoin -can make cash look even more appealing.
Are all banks equally safe?
The short answer is no. The longer answer is a subject we reported on in detail late last year. In brief, the Australian Government will guarantee up to $250,000 if it is deposited with an Authorised Deposit-taking Institution (ADI). Such banks, building societies or credit unions will need to have met strict criteria in order to gain this license. If your bank is an ADI, your savings are then covered by the Financial Claims Scheme (FCS), which means that your funds are guaranteed up to $250,000 (more detail here).
How do you know if your bank is covered?
You can check by looking up the register of all Authorised Deposit-taking Institutions on the Australian Prudential Regulation Authority (APRA) website directly or read more here. It’s worth stressing that there is a limit of guarantee of $250,000 per ADI so if you have a higher amount invested with any one institution it would be worth reviewing this strategy with a qualified professional.
Does this mean cash is a safe asset class?
Your cash deposits are protected by the above government guarantee, up to $250,000. But this does not necessarily mean it is without risk, or that its value can’t be eroded. Cash savings are described as ‘defensive’ assets for a reason. Many retirees like to know they can quickly access funds on a ‘rainy day’. This could be for medical costs, increased rent, family loans or emergencies. But how much is needed for a rainy day is debatable and well worth discussing before committing to very high balances which may actually be losing value. Which leads us to the next point…
What does inflation mean for cash savings?
The most recent 12-month inflation rate in Australia (as measured by the Consumer Price Index February 2023) was 6.8%. Bank accounts were rewarding savers with 3-4% interest over this time (some even less), so it is fair to say that the $500 example mentioned above would have been eroded by about 3%. This means that it would now have a “purchasing power” value of about $485, not $500. Over years, when applied to higher amounts, this erosion of capital can be a real drag on retirement income.
As always, the answer to whether something is a smart investment or not is bound to be ‘It depends’. Cash is protected, but not without the very real risk of erosion during times of high inflation, as is currently the case. Cash can form an important part of your asset allocation. This allocation may be in your private savings, or superannuation, or a mix of both. It is really important to understand whether your asset mix – whether in your super fund or outside it – suits your investment temperament. And whether it is appropriate to your current financial situation and short term needs. Additionally, it’s important to ask whether you are maximising your nest egg for the longer haul.
Those interested in learning more about risk tolerance may enjoy this further reading. We are also offering a free webinar on Wednesday the 5th April at 2pm (AEST) to discuss investment market basics. You can book here if you would like to attend.
If you would like to learn more about your own approach to risk and how this can influence asset allocation, Retirement Essentials offers tailored adviser led strategy consultations.