Glenn Stevens, the head of the Reserve Bank of Australia announced another interest rate cut last week, pushing the Australian Cash Rate down to a record low 2.0%. In addition, two weeks ago Mr Stevens raised concerns about how the global low interest rate environment is affecting retirees.
Referring to the global low interest rate environment, he said that rates are “perhaps the lowest ever in human history” raising the question of “how an adequate flow of income will be generated for the retired community in the future, in a world in which long term nominal returns on low risk assets are so low?”.
He certainly has a point. With interest rates so low, producing a sustainable income from your savings is now much harder.
Another issue making retirement income harder to generate, is the length of retirement. According to Stats NZ, people retiring now at age 65 can expect to live 20-25 years in retirement.
Since we are living so much longer now, the mind-set of being very conservatively invested once you enter retirement may need to be adjusted. Retirees may need to consider a larger element of capital growth in their portfolios than previous generations to ensure their savings can continue to produce reasonable income after many years of inflation.
People retiring at 65 now actually have a very long investment time horizon so a portfolio of only low-risk assets, like cash and bonds, will not do a good job of protecting against inflation eroding the real value of their original capital.
The right mix of growth and income assets is continuously changing and challenging to achieve because every retiree’s situation is different. Professional management and advice helps, but it is not a silver bullet.
The ASFA Retirement Standard in Australia believes for a couple to live a comfortable lifestyle during retirement, they will need about $58,000 AUD net p.a. Currently NZ Superannuation yields about $30,000 net p.a. for a couple. If we apply the Australian findings to NZ that leaves about $30,000 NZD p.a. of net income required from other sources, most likely your investments and that number will inevitably grow over the years as inflation erodes the real value of your money. So, consistently producing that level of income before exhausting your savings is the goal.
Retirees who are now increasing their investments in higher risk assets need to be acutely aware of the risks. But that is the reality of retirement today. The retirement age has not changed for many years and in the past when people only lived 10-15 years in retirement they could hold a much higher proportion of income assets. Now we are living 20-25 years in retirement, the situation has clearly changed.
Retirees who do opt for more growth in their portfolio need to understand this comes as a trade-off, with more growth assets comes more portfolio volatility (risk). This may be the most difficult thing for retirees to accept, but a long time horizon can provide a cushion against this risk.
A lower interest rate environment and a longer time horizon certainly make it harder for retirees, as Mr Stevens noted. Careful considerations are warranted but it is not all doom and gloom.
Disclaimer: This blog is intended to provide general information only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment or financial advice. Under no circumstances should investments be based solely on the information provided. Should you require financial advice you should always speak to an Authorised Financial Advisor.