ABC’s The Business last night ran an interesting segment on the hidden victims of the low interest rate environment: self-funded retirees.
According to the segment, self-funded retirees have suffered immensely from the sharp drop in interest rate, which has cut their term deposit returns by around 60%. At the same time, Australian Tax Office rules requiring retirees to withdraw a fixed percentage of their investment pool every year, combined with the lower returns, means that their savings are eroding fast, increasing longevity risk.
While I have some sympathy for their position, it should be noted that the current low returns on offer from term deposits are not unusual. As shown by the below charts, returns have been near these low levels on several occasions over the past 15 years:
That said, with the interest rates likely to fall further as the economy adjusts to the post-mining boom future, term deposit returns are likely to get worse before they get better.
The low returns on offer from safer investments like term deposits are likely to continue driving investors and retirees into risk assets, like shares and property. Already, we have seen a big reported surge in direct property investment from self-managed super funds (SMSFs), which is making regulators increasing nervous, with the Australian Securities and Investments Commission issuing repeated warnings to SMSFs about the dangers of property investment over the past year.
While Australia dodged much of the fallout from the Global Financial Crisis, we now appear to be following our European and North American cousins into financial repression, whereby borrows are bailed-out via low interest rates at the expense of depositors, who are forced to endure negative returns after inflation and tax.
