THERE was once a time when in retirement you could go to the local bank and lock in term deposit with interest rates of up to eight per cent. Not anymore.
Those days are long gone with thousands of retirees across the country pondering how to source a safe retirement income in the current low interest environment. Most are now forced to look elsewhere to maintain their living expenses and not dip into their retirement funds too quickly.
The problem is minimising the risks associated with the elsewhere alternatives.
Keeping the list to the most practical alternatives, we can identify a number of options -
Traditionally, fixed interest investments (predominantly based around government bonds) have been a safe option for providing regular income. The problem is that these bonds, like term deposits, have dropped in line with general interest rates over the past 25 years from rates as much as 12 per cent per year to the paltry current rate of 2.5 per cent per year.
An option that brings in a larger element of volatility is Australian shares.
There are a number of established bluechip companies such as Commonwealth Bank, Wesfarmers and Medibank Private that pay healthy dividends of five or six per cent with juicy franking credits to help offset tax or top up the yield with a tax credit, boosting the return closer to eight per cent for those with tax free super pensions.
Annuities have also been the mainstay for retirees over many years. An annuity pays a regular, guaranteed monthly income and can also be structured to return part, or all of the initial investment to your estate upon your death.
They can be set for a certain term (such as 10 years) otherwise be lifetime annuities and keep paying throughout your life, even if you live to 110. Annuities currently pay around three per cent income per year and up to four per cent for longer annuity periods.
Prior to the global financial crisis, another source of income was mortgage trusts. In the past, it was common for solicitors to arrange private mortgages however an increase in government regulation has largely fizzled out that arrangement.
Today there are several providers who act as private lenders and allow investors to participate in the interest in the loans they are writing.
The typical situation is a property owner needs to unlock equity from a property. The private lender will issue a first registered mortgage over the property and lend up to 60 per cent of the property value. The private lender will not allow any other borrowings against the property. The term of the loan is usually around 12 months, during which time the borrower will pay interest of approximately 10 per cent paid monthly.
Retirees are able to join in this loan and buy into it from the private lender. The private lender will keep some interest aside as their fee, and pay the retiree around eight per cent interest, paid monthly for the duration of the loan and pay the initial investment back at the end of the 12 months.
Some people may recall property trusts (one of the earlier forms of pooled investment) which also paid a regular monthly income of around five or six per cent per year. Unfortunately, they came unstuck after the 1987 share market crash along with a number of higher interest paying institutions.
You are still able to access income from various pooled property investments by investing in property trusts. You can buy into a portfolio of 10-50 office blocks, warehouses or retail spaces by using these funds. Some are listed on the Australian share market, like Garda and Centuria, and others are unlisted and structured through managed funds.
A large change over the last ten years has been the whole new world of income choices that has opened up in the form of Exchange Traded Funds which offer an almost unlimited choice of investing options covering all of the above areas (with the exception of annuities) and if you are prepared to use an array of them, you can invest in a diversified, highly liquid and potentially high income portfolio of investments.
Although the goal for most retirees is the same, that is, to generate enough income from their investments to enjoy financial security and independence in retirement whilst trying to maintain the capital, today we have to look further and wider to achieve this as the old bank term deposit just isn't cutting it at the moment.
Peter Lambert is a financial advisor with FinancialAdvisor.com.au.