Interest on bank accounts and fixed deposits is disappearing rapidly. Term deposit rates are approaching zero. The major banks are offering around 0.25 per cent on a twelve-month deposit and 0.45 per cent for three years. Rates top out at about 0.55 per cent per annum fixed for five years.
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Who would tie their money up for five years at half of one per cent per annum? It's difficult to imagine. There is talk that these rates could go lower yet. Are negative rates possible?
These rates aren't the banks' fault. It isn't a conspiracy to take advantage of depositors. It is due to the huge amount of cash in circulation. Governments here and overseas are spending up big to support their people and economies in response to Covid.
The Reserve Bank of Australia has also put extra cash into circulation to drive down interest rates and make borrowing cheap to stimulate spending and business activity. It is trying to cushion the severity of the recession caused by Covid and help the recovery.
Retirees would need about $10 million in the bank to be able to live on those rates. Even if the depositor doesn't spend the interest and reinvests, it isn't enough to keep up with inflation. The purchasing power of the money is being eroded.
Over the year to June 30 inflation fell to minus 0.3 per cent but that is abnormal. It is bound to quickly turn positive again. Over the last few years inflation has been 1.5 to 2.0 per cent per annum.
Retirees need income to live on. Conservative investors need a reasonable return. Alternatives to bank deposits are available for them. Many commercial property funds and shares still pay healthy incomes. Property funds Stockland and GPT are paying 5 to 6 per cent per annum and Cromwell 8 per cent.
Bank dividends may be unreliable but some other companies pay healthy and dependable incomes. For example Wesfarmers pays over 4 per cent, Harvey Norman nearly 5 per cent and Telstra over 5 per cent. BHP and Rio Tinto are very profitable and paying 5 to 6 per cent dividends. Another way to generate reliable cashflow is by capital drawdown, just as retirement pension plans do. They reinvest all distributions and pay out a fixed monthly drawdown amount at a pre-set rate, say 4 or 5 per cent per annum.
They invest at least partly in growth areas such as property and shares here and overseas to earn higher returns. For example balanced funds that invest partly in growth areas and partly defensive have earned around 7 per cent per annum for the last ten years.
Prices are down a little so it's a good time to be buying into these types of investments.
