-By Kevin Cuthbert

October 2019 saw official interest rates in Australia reach an all-time low of 0.75%, and it seems they will remain low for some time (Reserve Bank of Australia, 2019). Mortgage holders are understandably pleased, but if you have cash in the bank you could be feeling anxious or frustrated with the returns you’re receiving.

In my day to day work as an adviser, I’m finding my clients who are approaching or already in retirement are asking how they should invest in times of record low interest rates. It’s human nature to want to earn a higher interest rate while still protecting your money. Most people also want easy access to their capital if they need it. However, higher investment returns generally require taking on more risk.

While everyone’s situation and circumstances are different, it is a time to go back to basics. This environment is not without its challenges but there are opportunities to improve your position.

Tips for investing in low interest rate world 1:

1. Do a budget – you need to understand how much income you need to maintain your current lifestyle and where your money is going. Reviewing your budget will highlight other expenses where you may be able to save some money. Do you really need to take the risk and invest to earn more or are you being caught up in the hype of low interest rates? You may just need to accept that the environment has changed.

2. Pay off your debt – go to your existing bank and ask for a better deal (an interest rate reduction). Then consider your repayment frequency. Importantly, if you have money sitting in a low interest account explore options such as an offset account.

3. Review your risk tolerance – if the value of your investment fell by 20% how would you react? Would you want to sell or buy? What impact would it have on your future lifestyle.? Investments such as shares are more volatile but can earn greater returns. A term deposit does not fluctuate. You invest $50,000 today and in 12 months you receive back $50,000 with interest. The risk with a term deposit is the value of purchasing power. Will that $50,000 plus interest buy the same parcel of goods in 12 months’ time?

4. Diversify your investments - Spread the risk. Commensurate with your risk tolerance, invest in a manner that will allow you to sleep at night. Understand that we have economic cycles and those cycles impact interest rates and rates of return on all asset classes. Each asset class reacts differently at each stage of the cycle.

5. Understand your investments and the total return – capital and income – Be aware of where you invest. Have an understanding of the underlying investments, timeframes and volatility. Be comfortable with these. Providers are introducing some deposit solutions with higher interest rates and these can assist with additional income. Just ask, “What additional risk am I taking on for the extra return? What impact will it have on the ability to access my money?”. Reviewing your living arrangements can free up some additional capital to help generate some additional income. Just be mindful of the impact on any entitlements.

6. Maximise your age pension entitlements – In my dealings as an adviser, I have helped many people get what they are entitled to in this area.

When looking to invest be careful of taking advice from friends, family, work colleagues or the neighbour over the back fence. Speak to a professional who can help you understand what specific actions and options are available to you.

Source:

Reserve Bank of Australia: Cash Rate (1 October 2019). Retrieved From https://www.rba.gov.au/statistics/cash-rate/#cash-rate-chart