The recent interest rate cut has highlighted the pressures faced by retirees in finding low-risk income streams and the need for new products to generate those streams, according to the Association of Independent Retirees (AIR).
AIR acting president Wayne Strandquist said the action taken by the Reserve Bank of Australia to reduce the cash interest rate by 0.25 percentage points to an all-time low of 1.25 per cent was the continuation of a trend that has resulted in term deposit rates reaching record lows and being under half what they were when some retirees left the workforce over a decade ago.
Strandquist said the rate reduction comes as living costs are increasing and he pointed to an increase in the national minimum wage of 3 per cent compared to the 10 per cent decrease in bank term deposits that some retirees will receive.
“Fixed interest investment often forms a substantial part of a retiree’s superannuation and private savings portfolio, particularly in the latter years of retirement,” he said, adding the rate cut will impact on returns from term deposits and cash held in bank accounts by retirees.
“This reduction in income will lower the living standards of self-funded retirees or require larger drawdowns from retirement savings until retirees are increasingly dependent on the aged pension.”
He said the high life expectancies of Australians, combined with lower rates, would also hit those saving for, or already in, retirement.
“The increase in life expectancy means that workers need additional savings for retirement and higher returns from savings in retirement,” he said.
“While retirees today will enjoy longer retirement life, they face escalating health and aged-care costs due to advancement in medical science, technology and accommodation costs, as well as the usual increases in the cost of living. This is a classic income-cost squeeze.”
Retirees could be assisted by the release of new investment products designed to offset low interest rates, including the issuing of government infrastructure bonds for retirees, he said.
“There is significant public demand for infrastructure investment and this could satisfy a need for conservative fixed interest investments with better returns than cash deposits,” he noted.
