The day after the RBA cut cash rates on 3rd Feb this year, Libertas Wealth Consulting (Platinum Adviser) was interviewed by Channel 7 for their evening news Finance feature by David Koch on what investors can do to beat falling interest rates, especially self-funded retirees.
Two key points made were:
- review spending - and hold 3-5 years' drawings in cash and term deposits,
- review investments - and don't ignore 5 year term deposits or international shares.
Review spending and set aside cash
At the start of each year, especially after the expensive Christmas period, it's a good time to take stock of spending and check you're not wasting money on unnecessary costs.
This is especially useful for those drawing down from investments, such as a super pension, to meet living costs.
After paring back wasteful spending it is prudent to set 3 to 5 years's spending needs in cash and term deposits, depending on how much markets worry you. Those more prone to worry about share markets might prefer to hold five years' spending in cash and low risk assets like term deposits.
After the 3 February interest rate cut to 2.25% cash barely keeps pace with inflation, currently around 2.3% pa depending on the time period, which make cash a risky place to hold assets needed to fund your future living costs.
Once living costs are set aside, review the rest of your portfolio to ensure good diversification across investments with reasonable growth prospects over the next ten years. This should include a healthy allocation to shares, especially international shares given the concentration of the Australian economy into a few sectors - particularly financial services and mining.
While shares are one of the best ways to achieve long-term growth remember that they also pay dividends which helps top up the cash set aside to fund spending for the next 3-5 years. Also, be careful of investing into 'hybrids' which typically pay a set rate of interest or dividend; many now provide bond-like returns but carry shares-like risks, with newer ones able to suspend payments and convert into shares.
A final point on reviewing investments is to consider investing into long-dated term deposits, especially five-year deposits, rather than the more typical 6-month term favoured by many investors.
The morning after the rate cut five-year term deposits had the best premium over government bonds (around 1.7%), providing good value. The point of term deposits in portfolios is to provide low-risk certainty. Sure, rates will probably rise within the next five years, but they are also expected to fall further this year before then.
With the certainty afforded by long-dated term deposits investors should be able to sleep a little better knowing that share market movements become a lot less relevant to meeting day to day living costs, with better protection against inflation and the risk of outliving your savings.
If you would like independent financial advice specific to your own situation, rather than using the general information outlined above, please feel free to email firstname.lastname@example.org or call Michael on 02 8007 4255.