Self-funded retirees bear brunt of rock-bottom interest rates
SELF-FUNDED retirees are bearing the brunt of rock-bottom interest rates, prompting distress signals from these seniors as their incomes are drastically reduced.
On August 2 the Reserve Bank lowered its official cash rate to 1.5%, the lowest rate in its history, prompting retired Gold Coast accountant Norm Barrington, 87, to label self-funded retirees like himself "the forgotten race."
Some have seen their incomes slashed by up to 40% a year.
Norm Barrington said the Reserve Bank's policy of continually lowering the official cash rate as a tool to stimulate the economy, while it might help home loan borrowers and business, was having a disastrous effect on self-funded retirees, whose work had provided the backbone of the nation's progress after World War II.
He said it was also costing the government tax revenue, which meant less money to meet welfare obligations.
Tom Caldwell, the retired principal of a prominent Coffs Harbour accounting firm, said while Norm Barrington was correct, all interest rate environments and all investment classes had pitfalls for retirees.
"By definition if you are retired, you are not making money any more," Tom said.
"You can't just work harder to replace the money you lose or spend"
" Interest rates will go up eventually, but the economy will have to improve and costs will inevitably push up inflation.
"A high interest rate environment generally goes with high inflation and rapidly rising prices."
"Direct investment in real estate requires investment of a large lump sum; involves you in risks with tenants; no tenants; repairs; rates; maintenance, depreciation and other costs.
"To realise a profit, even if you achieve a capital gain, you have to sell the whole asset.
"With shares you are exposed to the ups and downs of the market."
Tom Caldwell said the government would describe any retiree with half a million dollars in the bank as 'wealthy' but it was clear this was not necessarily the case,when an investment of $500,000 at 2% gave a yearly income of just $10,000 or less than $193 a week.
"Once they begin eating into their capital they will rapidly exhaust it and will need the pension anyway," he said.
After a lifetime of working with business owners and individuals and investing in real estate and other assets himself, Tom says the best advice he can give a self-funded retiree is to be keenly aware of what you are paying out in fees.
After his own bad experience, where he forensically dissected a complex investment package put together for him by a financial planner, only to find he had been charged $16,000 in fees to lose $300,000, he is wary of using planners.
"If I'd done that as an accountant they'd have strung me up from a pole," he said.
He now chooses to invest directly in blue chip shares in the stock market through a broker.
"The advantage of using a financial planner is you can 'set and forget' " he said
"But they can muddle it up so much you have no idea what you are invested in."