One of the few positives of the Global Financial Crisis (GFC) has been high term deposit rates. During 2008, rates averaged about 6.5% and, although steadily declining, averaged a high 5.5% throughout 2011.
However, in 2012 as the world recovers from the GFC, term deposit rates have dropped to an average of 4.5% and are continuing to drop.
The reality of reduced term deposit rates for many self-funded retirees is a loss of more than 30% in income. This can have a real impact on retirees balancing increased living costs such as food and utilities.
While the GFC was known as a capital crisis, the drop in term deposit rates is creating an income crisis. Put simply, retirees have less money in their pockets.
For individuals in this position there are three possible options:
- Spend less
- Use capital
- Find other income sources
Having worked their whole lives to fund their retirement, there are not many retirees that would want to start spending less, nor would they wish to diminish the investments already made, thus ruling out options one and two.
Therefore, with term deposits down, it has become necessary to search for other income sources. The solution is to diversify income sources, which could include:
- Increase share market exposure. The industrial sector is currently providing 6 – 8% income return on average and some selected resource stocks are providing higher income returns. By way of comparison many of the banks are providing income returns of 7– 9% when including franking credits.
- Increase property exposure. The listed property trust seems to have learnt from the lessons of the GFC and now there are more “rent and manage” property trusts than development trusts. The yields on these tend to be between 6 – 8%.
It is important to exercise caution with the strategies above, they ought to be implemented with due consideration to your appetite for risk. There is no point in achieving a 7% income return if you lose capital.
- Change banks. Banks have been searching for capital post GFC, a trend that is likely to increase, with upcoming changes to global regulations under the guise of the Basel III standards.
- Other fixed income areas. Other fixed income areas such as “hybrid” raisings from banks and large corporates are becoming more prevalent. An example being the recent CBA Perls VI and Woolworths Notes. These carry longer terms than term deposits, with some containing equity conversions.
As you are lending your money to the institution, the terms need to be carefully examined, including the institution’s ability to repay. These quite often pay an extra 3 – 4% more than term deposits and whilst carrying extra risk they could be considered.
- Direct corporate bonds. With the health of Australian Corporate Balance Sheets, direct corporate bonds should be considered. This is lending with defined maturity terms to large corporates and quite often the rates can be 1.5 – 2.5% more than term deposits. The most important factor here is assessing the ability of the Corporate to repay the debt and interest within the term of the loan.
- Be aware of guaranteed returns. Lastly we caution investors in relation to many schemes and operations that provide “guaranteed” returns. A large financial group in Melbourne, “Banksia”, recently failed leaving $660 million in debentures unlikely to be paid to investors.
If you have not reviewed your investment portfolio recently, please contact your local William Buck Wealth Advisor to discuss.