On Monday the headline in The Australian declared, ‘Retirees more worried about future‘.
The latest Household Financial Comfort Report from ME Bank (see chart below) shows Retirees are the only household group to show a descrease in financial comfort over the past six months.
ME Bank surveyed 1,500 households. The aim was to find out how comfortable they feel about their current household financial situation, their future, and confidence in their finances. The scale ranges from 1 (least comfortable) to 10 (most comfortable):
It’s no surprise that retirees feel squeezed. While the RBA is busy lowering interest rates to make life easier for indebted households, it means cutting income for the poor old retiree (saver).
In August 2008 the official cash rate was 7.25%. Five years later it sits at an all-time low of 2.5%. Anyone living off the interest from their savings has suffered a 65% income cut.
Imagine the outcry from the unions if this happened to the average worker. But without a powerful lobby group to help, savers suffer in silence and make the necessary household budget changes. This isn’t easy.
Over the same period that retiree income has fallen, the cost of living has gone up (rates, electricity, fuel, food, health insurance etc.). Finding the fat in an already lean budget is no mean feat.
This catches retirees in a vice of falling income and rising costs.
So as interest rates fall further, expect to see the retiree discomfort level rise higher.
The Reserve Bank of Australia’s actions are proof of ‘one man’s food is truly another’s poison’.
The ME Bank survey blames the rising financial discomfort of retirees on:
‘The negative impact of lower deposit rates on their investments given their relatively high and defensive exposure to bank deposits rather than growth assets such as shares and investment properties‘.
Therein lies the challenge for retirees. The alternative to the safety of cash and fixed interest is to put more investment capital in higher yielding shares. But with the capital destruction of the GFC still in their memory, this option has little allure for retirees.
Little wonder the survey found retirees ‘increasingly worried about their investments, living standards and income stability.’
Retirees have these sentiments even though most retirees get the Age Pension (full or part) and the associated health benefits.
The Age Pension is obviously a welcome source of income but it hardly affords a life of travel and indulgence. A single pensioner receives a maximum of $19,000 per annum and couples can get $28,760.
The interest earned on savings was that little bit extra for the occasional treat that makes life worthwhile.
So is there a way out of the vice? And what lessons can baby boomers learn before retirement?
In the short term – next 2-3 years – a large position in cash and fixed interest will be both bitter and sweet.
The bitter part is interest rates will continue to fall as global economic conditions weaken. The RBA standard (and, only) response to worsening conditions is to turn the interest rate dial down.
You can expect rates to fall into the 1% zone (like Europe, USA & Japan). If a cash rate of 2.75% caused retiree discomfort levels to rise (the survey was conducted before yesterday’s rate cut), they are set to go much higher as rates fall.
The sweet bit is that the softening global economy should expose the impotency of the central bankers’ attempt to manipulate the market.
Without artificial stimulants, the so-called ‘growth’ assets of shares and property will return to earth with a thud. Cashed up retirees (as long as they are brave enough to be contrarian) will be in a position to buy assets at a cheaper price.
In the meantime they’ll need to fund any budget shortfalls from their investment capital. Knowingly reducing the capital base is far better than seeing it disappear in a severe market correction.
Waiting for the investment planets to align can be awfully frustrating and will test comfort levels. The key to remember in the investment world is nothing lasts forever. Markets always move in cycles.
For retirees there is light (however dim it may seem) at the end of the tunnel.
The lesson for newly and soon-to-be retired baby boomers (used to a higher standard of living than the older retirees) is to understand two huge trends that will impact their later years.
Firstly baby boomers will live (on average) longer – probably into their 90′s. Secondly, the age pension – due to demographics and low growth – will become harder to access.
The result of these two trends is that saved capital will have to do two things. It will need to last longer and deliver a higher percentage of living costs.
Managing these objectives requires spending time to learn how markets and the global economy work. There are no shortcuts. The fact you’re reading this shows you’re committed to building knowledge. That’s great.
After all, your retirement capital may have to sustain you for 30+ years. Over this time markets and interest rates are certain to rise and fall several times. It will be a challenge to stay ahead of these trends, to enable you to allocate capital to the best asset class.
The only thing I’m reasonably certain of is the next 30 years won’t be anything like the past 30 years.
As credit leaves the system, there will be all sorts of unintended consequences (historically low interest rates are one of those).
No one knows what havoc and opportunities The Great Credit Contraction will bring. However, informed investors may have a better chance of exploiting what looks set to be a volatile period in financial markets.
Vern Gowdie
Editor, Gowdie Family Wealth
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The Dark Side of Technology: Part 2
23-07-2013 – Sam Volkering
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