Another rate rise – Is it time to rethink cash?
Last Tuesday the Reserve Bank Governor Philip Lowe announced a 50-basis point increase in the official cash rate, raising it from 0.85% to 1.35%.
This increase is the third in three months, following those of 0.25% in May, and 0.50% in June. Governor Lowe noted at the time of the increase that the bank expects to continue to raise rates throughout the year. He stated that the rate increases are intended to curb inflation, which he expects may be as high as 7% by the end of the year.
Most economists are generally in agreement about these inflation predictions. And this week’s extensive flooding in some of the more fertile parts of the eastern seaboard will only add to pressure on food prices. External pressures including supply chain shortages and the war in Ukraine also exacerbate these inflationary trends.
There are always two major responses to any change in interest rates. Borrowers are usually dismayed, with the new official cash rate translating into an extra $144 per month on a $500,000 mortgage. For those with high loans and static salaries, the thought of consecutive interest rate rises over the coming months is far from welcome.
Savers, on the other hand, are now starting to see a glacial rise in their returns on savings accounts. It is noticeable that the major banks have a habit of passing on the full interest rate rises to borrowers within 24 hours. And taking much longer to pass on interest rate increases to their savings customers, sometimes not passing on the full amount.
That said, the rates being offered on savings accounts are slowly increasing.
This may lead many retirees with significant funds in cash to be pleased with their portfolio mix.
There is another really interesting and novel factor involved which can influence your retirement income.
And that is the freezing of deeming rates (currently 2.25% for earnings above $56,400 for singles and $93,600 for couples). This rate will not be altered before June 30 2023. So if market rates were to rise above 2.25%, it could be argued that those affected by deeming (full or part Age Pensioners and those holding a Commonwealth Seniors Health Card) have finally ‘won’.
But have you?
The returns on cash have been so low for so long, cash balances at call have barely earned more than a handful of dollars. With rates still very low, albeit slightly higher than last year, money at call continues to earn less than 2%.
This compares poorly with the 10-year return on superannuation. Yes, funds are reporting losses for this last financial year of about 3% (depending upon the fund and risk profiles). But this comes after a year of 13% returns. The most useful longer term benchmark of returns is the 10-year average of 7-8%.
Cash is a seductive investment. It seems more tangible, and therefore appears to be more ‘rock solid’ and accessible than investments in superannuation.
But for those who have reached preservation age or met the necessary conditions, super is totally accessible, whether via an income stream, or lump sums (which may take from two to five days to withdraw).
Yes, your super is subject to market fluctuations, but overall Australian superannuation has returned well over the long haul.
Your $10,000 cash deposit from January 1 this year may return an annual amount of $100 in interest, but with fruit and vegetables now costing at least 6% more, your $10,000 is buying far less.
As always, striking the ‘sweet spot’ by selecting balanced assets which deliver financial peace of mind can be very challenging. But a useful first step is to understand how different asset classes are performing and which combination will best suit your needs.
The most important thing is that you do the sums and armed with the results, make the decision that allows you to feel most comfortable.
And if you wish to talk to an experienced retirement income adviser, you can always make an appointment with Retirement Essentials for a one-on-one consultation to share your questions and better understand your options.
What’s your view on cash investments as part of your retirement income mix? How important are they?
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.