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Cash, bonds creating drag on retirement income

cash bonds retirement income

Cash and bonds are causing retirement income to go backwards according to one fund manager who has warned that ‘lazy assets’ will cost retirees.

Retirees committed to high levels of cash and bonds in their investments are likely to be losing around $13,000 in income each year and that figure is likely to climb as interest rates stay low for longer periods, according to an retirement income focused investment manager.

Plato Investment Management managing director Don Hamson said the low interest rate environment should be an issue of concern for retirees who are in pension phase and looking to replace their monthly income from investments, which may not match their life expectancy.

“Real earnings for headline inflation shows that for someone with $1 million in overnight cash or government bonds after inflation it is worth $13,000 less at the end of the year, and that assumes you are a retiree that is not paying tax. If you are paying tax it is even worse,” Hamson explained.

“If you are sitting in lazy cash or government bonds, which are now returning about 70 basis points (0.70 per cent) you will be losing about $13,000 after taking account of inflation, and that will not fund a decent retirement income stream.”

According to Hamson expectations of an increase in interest rates are unlikely with rates likely to continue to drop following the recent 0.25 per cent cut made by the Reserve Bank of Australia.

“People are wondering when the next one will be as the US Federal Reserve has cut its rate by 50 basis points (0.50 per cent) and the Bank of Canada has cut by the same, so many people are factoring in one more cut in Australia.”

“This is not new, but the coronavirus and bushfires have reinforced the likelihood of a recession is now higher than three months ago, including meaning interest rates will be lower for longer,” Hamson added.

He also highlighted the potential impact of higher longevity on retirees in the current economic circumstance

“Retirees are facing longevity risk, that is people are living for longer, at the same time as interest rates are getting smaller,” Hamson said.

“Longevity risk is a real problem if you can’t access the pension because of other assets, such as real estate, yet $1 million will probably not be enough for retirees if investing in safe assets [such as cash and bonds].

“You will probably run out of money before you die but if you can lift your investments and go into a balanced fund and increase that return to 3 to 4 per cent in real terms you should be fine.”

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