Low interest rates and your income in retirement

Low interest rates have been the driving force behind Australia’s economy for the past decade. And while that’s been great news for property investors, it’s also made it harder for pensioners to earn an income from their retirement savings.

The Reserve Bank recently lowered interest rates to a record low of just 0.25%. If you prefer low risk investment options like Cash and Fixed Income, the low interest rate environment means your retirement income may be lower than you expected.

With interest rates expected to remain low for the foreseeable future, it may be time to re-evaluate your investment strategy. Here’s how to get started.

About lifecycle investing

Lifecycle investing means adjusting your financial risk to suit your life stage. So while you might opt for an aggressive mix of super options in your 30s and 40s, as you approach retirement you’ll probably start looking for safer options that aren’t as likely to see dramatic shifts up or down.

For most retirees that means opting for Cash and Fixed Interest investments. And while that was an effective strategy when interest rates were higher, it might not be as effective these days. That’s because low interest rates impact the returns you receive on your Cash or Fixed Interest options, and these returns may no longer be enough to keep up with inflation, or the income that you were expecting to see from your super balance. 

Understand your needs

If you’re retired, your superannuation returns don’t exist in a bubble. For most people they’re part of a broader income stream that might include the Age Pension, other investments and perhaps some part time work. How all those elements fit together and how much money you need to maintain your lifestyle varies from person to person. 

One thing you need to keep in mind is draw-down rates. This is the minimum amount that you need to withdraw ever year if you have an account-based pension. Annual draw down rates were halved in March (from 4% to 2%) because of the coronavirus impact on investments. In other words, the amount of money that you have to withdraw from your super pension account balance every year was cut in half. The new draw down rates will apply to the current 2020/2021 financial year.

These changes were made to protect balances that may have been reduced due to coronavirus related drops in the market. But they don’t address the underlying problem of low returns.

Consider your risk

A Pension Account is a great way to hold your money in retirement, because there’s no tax payable on either income or capital gains in the account. And if you’re a cautious investor you can hold your Pension Account money in lower risk investment options like Cash or Fixed Interest.

But if you’re finding that traditional low-risk investment options aren’t delivering the returns you need, you can look for higher returns in other investment options. However, higher returns can mean higher risks and the potential for loss at some stage.

You can view our investment options and their corresponding returns here.

Maximise your benefits

If you’re supporting your retirement with a full or part age pension, you'll want to make sure you’re receiving all your entitlements. And as your superannuation income shrinks as time goes by you may be eligible for increased age pension payments, which can help offset any decreases in other income sources.

Aside from age pension payments, you may also be entitled to additional benefits including an energy supplement, carer allowance, and rent assistance. In other words, it pays to check in with Centrelink to ensure they’re assessing your income and assets correctly. This is something a financial planner can assist with, and you can learn more about our financial planning services here.

Consider your superannuation options

While cash and fixed interest investments have been the go-to options for many retirees in the draw-down phase of their super, the ‘search for yield’ has seen people look further afield to maintain their income.

So if you’re finding that the return you’re seeing on your super isn’t keeping up with your expectations it may be time to speak with a professional.

Our financial planners can assist you with income options in retirement, and how to structure your assets in a way that provides both financial security and a lifestyle you can enjoy. Find out more booking an appointment via the link below or calling us on 1300 655 002.

Speak to a financial planner

A qualified financial planner can help you understand your investment options. 

Authorised by Togethr Trustees Pty Ltd (ABN 64 006 964 049; AFSL 246383), the trustee of MyLifeMyMoney Superannuation Fund (ABN 50 237 896 957; SPIN CSF0100AU). Catholic Super and MyLife MySuper are divisions of MyLifeMyMoney Superannuation Fund. Financial advice services may be provided to members by the trustee's related entity.

Togethr Financial Planning Pty Ltd (ABN 84 124 491 078; AFSL 455010). The information contained herein is general information only. It has been prepared without taking into account your personal investment objectives, financial situation, or needs. It is not intended to be, and should not be, construed in any way as investment, legal or financial advice. Please consider your personal position, objectives, and requirements before taking any action.

© 2020 Togethr Trustees Pty Ltd. For further information please our contact our Service Centre on 1300 655 002 or visit our website: csf.com.au.