Smart ways to stretch retirement money
Just think that in early June 2008, the Reserve Bank's cash rate stood at 7.25 per cent. Now fast forward nine years to early June 2017 and Australia's current cash rate is 1.5 per cent.
And just think of the impact of falling interest rates on the many retirees who may have become accustomed before the GFC aftermath to financing their retirement from the interest and yields generated by their portfolios.
Numerous retirees – as well as the swelling numbers of investors on the eve of retirement – are still struggling to adjust their expectations and practices for a low-interest environment.
Every time that the Reserve Bank has announced its latest decision in recent years on the official or "target" cash rate, retirees in particular have received just another reminder of how much rates have fallen. (The Reserve Bank this month has left its cash rate at 1.5 per cent for the 10th time in succession.)
In turn, the Reserve Bank regular interest rate decisions remind retirees that their bond interest rates and interest on term deposits are well below historic averages. But it's not as if they need any reminders.
What choices does a retiree have if they had become used to living off the interest and yield produced by their portfolios?
Many retirees may think, probably fleetingly, about trying to reduce their cost of living. Yet while most of us can spend our money more efficiently, few retirees would be willing or able to reduce their standards of living.
If unable to cut their living costs in a meaningful way, many retirees may jump to the conclusion that their only other choice is to move away from their carefully-prepared target or strategic asset allocations. Such a move usually involves increasing exposure to higher-risk, higher-yield bonds and a more-concentrated selection of high-dividend shares.
In short, retirees who put aside their strategic asset allocations of their broadly-diversified portfolios in pursuit of higher interest and yields are likely to become more exposed to market risk and volatility. And this may damage their portfolio's overall health and longevity.
Fortunately, another possible solution for retirees is to take a total-return approach to financing their retirement spending.
A classic Vanguard research paper, Total-return investing: An enduring solution for low yields, suggests that retirees consider taking both the income returns and the capital returns of a portfolio into account when setting retirement drawdowns and spending.
With this approach, retirees can aim to keep their appropriate asset allocations and broadly-diversified portfolio in tact rather than switching to a higher-risk portfolio.
Further, retirees should consider whether to take specialist advice about how much they should be drawing down from their retirement savings given their circumstances including the levels of yields/interest and capital gains being produced by their portfolios.
It is sometimes said that some retirees are unnecessarily frugal in their retirement spending given the understandable concern of outliving their savings. Taking a total return approach should help them make a realistic assessment of their portfolios and of their spending habits.
Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
19 June 2017
www.vanguardinvestments.com.au
Latest Newsletters
Hot Issues
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
- Time to start planning for stage 3 tax cuts: technical manager
- Millions of Australians lose by leaving savings in default MySuper funds
- Vanguard economic and market outlook for 2024: A return to sound money
- An investment year of ups and downs
- How to tame the market's skewness
- The Countries that Export the Most Wine in the World
- Tips for preparing for the best tax outcomes
Article archive
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
July - September 2017 archive
- ATO to release further guidance on reserves
- A real-world benchmark for SMSF performance
- How is your super going, ready for retirement?
- Our 'hardest' SMSF tasks
- Lack of literacy promotes unrealistic goals
- Young investors: Time is on your side
- Is your SMSF retirement-ready?
- Key Economic Indicators, 2017 - updated
- Investors acting their age
- ATO locks in details, addresses panic on real-time reporting
- Government ‘undermines’ tax system in new moves on property expenses
- Multiple super accounts in a 'gig' society
- Why Australian retirees aren't happy and what we can do about it
- Doing a budget is a good idea but ....
- Technical expert flags estate planning strategies for 2017-18
- Government to shut down salary sacrifice loophole
- Items that heat up your depreciation deductions
- ‘Tens of thousands’ of SMSFs at risk with ECPI
- Do’s and don’ts of estate planning
- LISTO to help boost women’s super
- Smart ways to stretch retirement money
- Low economic growth likely for years
- Recorded Crime - Offenders, 2015-16
- Adequacy of savings still a concern among Australians