Right now, the two questions I get asked the most are, what’s my reaction to the election of Joe Biden as the US president, and what’s going to happen in a world where interest rates look like staying low for years to come?
There are no easy answers, but I have long believed that success requires you to follow some basic principles. A favourite of mine, as we face such uncertain times ahead, is that if you take care of the things you can control, you won’t need to worry too much about the things you can’t control. Let’s face it, there is nothing you or I can do to affect the outcome of the American election.
However, it’s an odds-on bet that there will be a couple of months of euphoria, before reality sets in as the new government faces the challenges of skyrocketing debt and the difficulty of combating coronavirus once it gets out of control. The change in government in America won’t make much different to that – the gap between the haves and have-nots will continue to grow.
Last week the Reserve Bank of Australia acted, dropping interest rates even further. To make matters worse for retirees, there are hints that the next move is more likely to be down not up. Consequently, I have been receiving a flood of emails from readers asking where they could find the best bank interest rates on their deposits.
There are two major issues here; first, finding the best rates, and second, solving the problem of how to exist in a low interest rate environment.
To find the best rate I suggest you search online using websites such as Finder, Canstar and RateCity. At time of writing, the best I could find was 1.50 per cent from Judo Bank for a three-year term but keep in mind that rates change continually in the light of the banks’ cash position on the day. Furthermore, many so-called honeymoon rates may be good for six months, and then revert to the bank’s normal rate.
There may also be special conditions. Right now, my wife has an at call account with St George Bank, which pays a face rate of 0.20 per cent but which moves up to 0.70 per cent provided she deposits at least $50 each month.
But the bigger picture here is the role of cash in your portfolio. If you are extremely nervous, and have total financial assets of say $200,000, a difference of 0.5 per cent is only worth $1,000 a year to you. That’s not much in the scheme of things. And changing banks continually to grab an extra 0.5 per cent is a mug’s game – you will pay more than you save by incurring extra fees and possibly a loss of interest while funds are being cleared.
If the sum is bigger, it is not prudent to keep your whole portfolio in cash. Let’s face it – cash is the most expensive asset class you can own as it’s selling at 100 times earnings.
The obvious solution is to seek financial advice about a balanced portfolio, or simply do it yourself via an index fund such as Vanguard Australian Shares Index, which currently has a yield of around 4.5 per cent. The cream on the cake is that the yield is mostly franked so if you are retired with a tax-free income, you will get all the franking credits back. This would take an effective yield to close to over 6 per cent. Full details are given in Retirement Made Simple, my new book, that’s available to Starts at 60 members on the Starts at 60 Marketplace.
I appreciate that shares are volatile, but by definition an index cannot go broke, and the index fund should keep on paying the dividends irrespective of the normal ups and downs of the share price.
And the great thing about shares is that you don’t need to outlay a massive sum. Let’s say you were rather risk-averse, and your financial assets were $300,000, all in cash. You could simply leave $250,000 in cash and put your toe in the water by investing $50,000 in an index fund. That huge cash buffer would give you heaps of time to ride out any falls in stock market, and the investment in the index fund would give you great experience with shares.
Of course, if you’re on the Age Pension and are asset tested, every $10,000 you spend returns the equivalent of 7.8 per cent per annum via a reduction in assessable assets. So instead of chasing an extra 0.05 per cent on your $200,000 cash portfolio, you could simply spend $15,000 on a trip or home renovations, and get an immediate increase in your pension of $1,170 a year. That’s much more fun than chasing a few more basis points on your term deposit.
Read more classic Noel Whittaker wit and wisdom in ‘Retirement Made Simple’, his new, must-have guidebook that deals with the many financial and lifestyle quandaries facing retirees today, available from the Starts at 60 Marketplace now.
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