The cost of living has moved closer to the income generated by cash investments, meaning retirees should look elsewhere for better-performing fixed income assets, with private credit attractive due to its links to interest rates, a fund manager has said.
Capspace managing director Tim Keith noted recently released Australian Bureau of Statistics (ABS) inflation figures by household type showed living costs rose by around 4 per cent to 6 per cent for most demographics.
Keith pointed to the ABS Living Cost Indexes (LCI), which include mortgage interest costs rather than the cost of new dwellings included in the consumer price index, with the data showing the employee LCI rose 6.2 per cent in the second quarter of 2024 from a year earlier.
At the same time, the pensioner and beneficiary LCI rose 4.1 per cent, the age pensioner LCI rose 3.7 per cent and the self-funded retiree LCI rose 3.8 per cent from a year earlier.
“With sticky inflation, Australians close to retirement should be devoting more of their investment portfolios to fixed income assets such as private credit to boost the real return on their assets, otherwise known as the return after inflation, which currently sits at 3.8 per cent,” Keith said.
“Arguably retirees’ investment strategies and those of self-managed superannuation funds should consider diversification into private credit investments, which can deliver investors yields close to 10 per cent per annum, well above the returns on bank term deposits or online savings accounts, which in June generally sat at less than 5 per cent per annum.”
He added the returns from private credit investments, or returns on corporate loans, were typically linked to official interest rates and presented a viable option to traditional sources of income, but he warned not all products offered the same features.
“More defensive assets, such as fixed income and private credit particularly, may deliver more attractive yields than residential property, cash or fully franked shares. That’s a key detail because it is income-yielding assets that will support Australians in everyday living and in retirement,” he said.
“It’s important for investors to consider that not all private credit funds are the same and that before investing they are satisfied that the fund manager has a stringent loan qualification process, excess protection for investors via mortgage security, adequate liquidity and is transparent with investors on the loan portfolio they manage within the private credit fund.”
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