The problem with cash. “We can’t live off that!”
Retirees are only too well aware how far interest rates have dropped. The decline has been great for younger people paying off mortgages, but terrible for people funding retirement spending from bank account interest. We’re at record low interest rates, and cash investments, like bank deposits, typically pay well less than 1% and many pay nothing. This is not enough even to keep up with inflation.
However, many retirees are most comfortable with cash or bank deposits. We see this in our clients with about 30% almost entirely invested in cash and bank deposits.
Frankly, being invested entirely in cash for funding retirement is unlikely to be the best retirement strategy. In general, being in a diversified portfolio of assets should deliver greater returns over the medium and longer term and thus generate more retirement income.
Cash vs a diversified portfolio
Let’s see how by comparing two otherwise identical investors – one who stays in cash and the other who holds diversified investments. What are their likely retirement finances going to look like? We don’t know for sure, because we don’t know what’s going to happen to interest rates and financial markets. But we can make some educated estimates.
Mr Cashman decided a few years ago to take all his money out of super at age 66 and put it in the bank. He’s now 70 and has $350,000 in the bank.
Taking into account his Age Pension, the interest from his bank account and drawing down capital from the bank deposits he might have an income of about $33,000 per year to fund his retirement spending.
Even if we allow that interest rates may move up from their current historical lows, it’s still likely that his interest earnings will be very modest. The average forecast we use in our model is for cash interest rates averaging 2.1% over the next 30 years.
And if interest rates stayed where they are today, Mr Cashman would earn even less. His Age Pension would comprise the vast majority of his income.
Mr Diverse took a different approach. He’s maintained his diversified portfolio approach in his super fund. He’s also 70 and with his 50/50 mix of shares and fixed income investments, we project a likely sustainable retirement income of $36,400 per year through age 100.
We estimate the diversified approach will lead to Mr Diverse having about $3,400 per year more Mr Diverse $3,400 more per year than an all cash approach. That’s about 10% more in annual income.
Now, Mr Diverse is taking on a bit more short-term risk to get there. Shares and bonds in his portfolio will fluctuate in value…and that can be a bit nerve-wracking, like when COVID first hit home in March this year…a 50/50 portfolio typically dropped in value by 14% before beginning to recover.
But being on a part pension greatly reduced the risk of that decline. When his investments dropped in value Mr Diverse was able to inform Centrelink and get an increase in his Age Pension. For each $1000 drop in his super assets his annual age pension increased by $78. This helped him weather the storm of the drop in the value of his investments.
So, while many people see cash as the “safe” investment, they’re only right in thinking that their balance doesn’t go up and down as much. Because interest rates are so low, their purchasing power gets quickly eroded by inflation. Diversified portfolios have some short term risk but allow access to investments that may well perform better than cash over time…and so help deal with the risk of living on too low an income and having it eaten away by inflation
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 any 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.
We have no super and no money to pay bills I am 66 and my husband is approaching 65 and we cannot afford to live
Why did you not plan for your old age??? What did you think was going to happen when you reached retirement age??? Did you think the fairy godmother would leave you a cash bonus? You have worked for the best part of 45 something years, have you not saved any thing? My best suggestion is stay at work if you have jobs and do not make your family keep you. Great example for the grand children!!!
It’s early to make judgements on people without knowing their past and present situations.
Thank you for the article. Any more articles on Super option balance?
Fred, what would you like to know? More about balanced funds in super, or what your asset allocation should be in retirement? Or something else? Thanks.
I’m retired and 70 yr old
I left my super as it this
Since it not much
But the interest earned lowest than the yearly cost
What is your advice
Thank you
Hi, most super funds have provided returns well above their costs over time. You might want to check that your fund isn’t charging too much. There is a big range of super fund costs out there.
Hello, thanks for the article. I’m 66 and trying to figure out how best to ease into retirement by degrees (I’m self-employed). I have a modest amount of super, and a similar amount of money sitting in the bank, and yes: now that the rates seem to have recovered from the March-April fall, I want to invest it – wondering whether to add it into my super or start a separate investment portfolio. I don’t pay much tax (my earnings are low, and will be getting lower) so don’t necessarily need the tax incentive of putting it into Super. Any comments?
Jenni, while you’re still working the concessional contributions of superannuation may be worthwhile (you pay only 15% tax on contributions(unless your income is very high)). When retired, you can take tax-free payments out of an account based pension (which you can convert your accumulation super to). Alternatively, most retirees on moderate incomes don’t much if any tax and you may find you don’t need the superannuation layer (sometimes with extra costs). On the other hand, a good super fund gives you good low cost management of a diversified portfolio. It may be a good time to see a financial planner.
Hi, just after some clarification. My husband is 57 and on $130000.00 a year. I’m 55 and currently not working. Wishing to top up our Super but my husband’s boss will not salary sacrifice, so need to do ourselves.
On my calculations this allows my husband to contribute approx $12650.00 extra.
If he puts $3000.00 into my account will he get the 18% tax offset? and how do we do this.
Then put the remainder in his Super.
Also although I don’t currently work I do receive a small amount in interest and dividends. Can I also put money into super and receive the govt co contribution payment.
Many thanks for any help and advice.
Hi Amanda. The super rules can be a bit tricky as to what you can do in different situations so we can’t give you advice on this. People can make personal contributions to super and claim a tax deduction if they meet specific criteria. This page on the ATO website gives more details if you want to check it out It outlines what you can and can’t claim and the process for letting your super fund know you intend to claim. This page gives more details on spouse contributions.
Money Smart is also a terrific resource. Here is a link to their superannuation section. You should also consider talking to a financial adviser.
I’m a younger person who has recently taken an interest in super and funding my retirement. I understand that by the time I get to retirement the circumstances will likely have changed. However, I appreciate how thought-provoking this is.