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Low interest rates: a retiree survival guide

Anthony Fensom  |  22 May 2015Text size  Decrease  Increase  |  
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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.


Australia's lowest interest rates on record have hit retirees hard, with deposit rates barely matching inflation. With forecasts that rates could fall even further, how can retirees protect their income?

According to Morningstar credit analyst John Likos, a continued period of low interest rates is expected during 2015, with the "search-for-yield theme" to continue unabated as investors chase higher returns.

On 5 May, the Reserve Bank of Australia (RBA) reduced its official cash rate to just 2 per cent, and the meeting minutes released a fortnight later showed it might consider further cuts to boost activity, citing weak growth, soft inflation and higher unemployment, with housing prices declining outside Sydney and Melbourne.

Analyst reaction was mixed, with JP Morgan's Ben Jarman saying the RBA would "stay on hold" unless the economy softened further, while UBS economist Scott Haslem forecast no change for "at least six months".

However, both Citigroup's Paul Brennan and Nomura Australia's Andrew Ticehurst predicted another cut by November at the latest, with BetaShares' David Bassanese expecting a new low of 1.5 per cent by year-end.

With low rates seemingly here to stay, here are some options for retirees looking to achieve higher returns, with varying risk levels:

1) Credit securities

The phenomenon of negative yields has increasingly been seen in Europe, with Morningstar's Likos noting that Nestle recently became the first corporate issuer in history with a negative bond yield, sparking comments that "chocolate may well be the new gold!"

In Australia though, investors can still obtain positive yields, including from credit securities issued by banks and corporates.

According to Likos, the credit securities in Morningstar's Moat-Focused Credit Best Ideas provide a "solid starting point for a stable income investment strategy," although investors should consider each security with reference to their existing holdings and risk appetite.

In March, the portfolio included major-bank-issued tier-1 capital hybrids as well as "new-style" hybrids from Australia's "big four" banks, as well as corporate issues from Goodman Group (GMG), Ramsay Health Care (RHC), Tatts Group (TTS) and Woolworths (WOW), with yields as high as 6.9 per cent.

2) Exchange-traded funds (ETFs)

ETFs are investment funds listed on the Australian Securities Exchange that are designed to track the performance of a specific asset, such as a share price index, commodity or bonds.

Investors can gain exposure to high-dividend-paying companies through the Russell High Dividend Australian Shares (RDV) or the iShares S&P/ASX High Dividend (IHD).

There are also sector-specific ETFs such as BetaShares' S&P/ASX 200 Financial Sector ETF (QFN), which tracks the performance of financial stocks.

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