Navigating interest rate cuts: how retirees can protect their investments
In this week’s video insight, I delve into the recent interest rate cut by the Reserve Bank of Australia (RBA) and what it means for self-funded retirees relying on cash and term deposits. With lower rates affecting returns, I explore the broader implications for retirement income and discuss private credit as one potential alternative to help navigate this changing landscape.
Transcript:
Hello everyone, and welcome back to our video insights series. Today, we’re exploring a topic that’s crucial for many self-funded retirees: the recent interest rate cuts by the Reserve Bank of Australia (RBA) and how they affect some of your investments. More importantly, we’ll introduce a helpful alternative that could help mitigate the impacts. This month the RBA reduced its overnight cash rate by 25 basis points. This decision, while aimed at stimulating economic activity, benefits those with a mortgage and those with large debt piles – like the state and federal governments, but it has significant negative repercussions for those relying on standard interest-bearing investments.
According to the Australian Taxation Office (ATO), self-managed super funds (SMSF’s) hold approximately $162 billion in cash and term deposits, accounting for about 16 per cent of their net assets. Does that sound like you? With interest rates on online savings accounts typically yielding less than two per cent, and inflation hovering around 2.5 per cent, the real returns on these investments are effectively zero or even negative. And don’t brush off the importance of that; it means next year you won’t be able to afford to buy everything you could afford this year. Negative real returns mean you are effectively poorer than you were.
For self-funded retirees, who often depend on the income generated from these investments, the rate drop presents a significant challenge. The traditional safe havens of cash and term deposits don’t provide the returns to sustain the purchasing power of their retirement income.
Given the recent landscape, it’s essential to reassess your investment strategy with an adviser who knows your financial circumstances and understands your needs, objectives and risk tolerances. One viable alternative gaining traction for perhaps a proportion of those negative-returning investments is private credit.
Private credit involves investing in a fund that allocates that capital to businesses via loans, either directly, or indirectly through originators. It used to be banks that were the sole provider of these loans, but due to regulation after the global financial crisis (GFC), they have pulled back, opening an opportunity for non-bank lenders to generate returns for investors by lending to the same borrowers the banks used to finance. Importantly, private credit can produce higher returns compared to traditional fixed-income products, albeit with varying degrees of risk.
So, what should you think about when considering private credit?
Perhaps the returns come first. Private credit investments can offer yields of up to 10 per cent, per annum, providing a steady income stream that outpaces inflation. In terms of diversification, incorporating private credit into your portfolio adds an investment with low correlation to more volatile public markets. And as an inflation hedge, many private credit instruments have floating interest rates, which can adjust in response to changes in the broader economic environment.
Of course, while private credit presents promising opportunities, it’s crucial to approach it with a clear understanding of associated risks. For me, liquidity comes to mind first. Some private credit funds lock you in for a period of time, while others don’t. It’s also important to find a fund that has been around for a long time, has a long track record including through challenging economic periods, and one that displays low levels of arrears and defaults. And finally, a high-quality loan book, for example, one with an investment grade such as BB or AA or even higher can also provide additional comfort.
Now, risks shouldn’t be ignored in the pursuit of higher returns. The Australian Securities & Investments Commission (ASIC) has highlighted concerns over the treatment of investors as well concerns about disclosure in private markets. Their concerns should compel you to conduct thorough due diligence or seek the advice of a personal professional.
The return of a lower-interest environment has re-emphasised the challenges for self-funded retirees relying on traditional income streams to meet living expenses, healthcare and even support for children and grandchildren. By exploring alternative investments like private credit, you can potentially enhance your returns, secure a more comfortable lifestyle and perhaps do it with relatively low risk. Every investment comes with risks of course, so thorough research and professional guidance are paramount.
Well, that’s all we have for today. If you found this video helpful, please like, subscribe, and share it with others who might benefit. Until next time, please follow us on Facebook and X.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
