Yesterday, the Reserve Bank announced its decision to cut the official cash rate for first time in 18 months, down by 25 basis points to 2.25 per cent.
Commenting on the decision, National Seniors chief executive Michael O’Neill said seniors living off “simple investments” will be the hardest hit by the decision.
“Seniors aged over 65 own 45.3 per cent of bank and financial institution term deposits and most of them are on low, fixed incomes,’’ Mr O’Neill said.
“Today’s cut simply means less money in the pockets of many, many retirees around Australia.
“What’s probably most concerning is that the cash rate is now more than a percentage point lower than the highest deeming rate (3.5 per cent) and is close to the lower deeming rate (2.0 per cent), making it more difficult to earn decent returns.”
However, Mr Hockey issued a statement welcoming the move as “good news for families, small business, the economy and jobs.”
“This is the first interest rate cut in 18 months and will put an extra $750 a year into the pockets of a typical Australian family with a mortgage of $300,000,” the statement said.
“The cut comes on top of recent falls in the price of petrol – saving the typical Australian family around $80 per month compared with the middle of last year.”
The treasurer urged banks to pass on the cuts to consumers.
Cash and fixed interest’s role in a portfolio is to provide security and preservation of capital, not to generate returns. Anyone unhappy with low rate returns has plenty of options to enhance returns if they are willing to accept the risk. Everyone has the choice. For many, the risk of low returns and what it means for their lifestyle and longevity of capital is a far greater risk (when considered rationally) than the risk of diversifying into other asset classes via quality advice.
For a large part of the conservative investors portfolio to maintain security, the penalty of low rates may still be the best course. An unfortunate case of the lesser of two evils.
Diversification is all important, but an increase to higher risk (sorry “growth”) assets in the portfolio, just to chase yield may be inappropriate should a major correction surprise in the short to medium term.
History teaches us that boring old cash buys a lot of low risk rewards when the risky stuff turns nasty.
Maybe these retirees should invest in some sound advice and diversify their portfolios, not ‘escape’ to ‘safe-haven’ investments as National Seniors, and Academics would have us believe.
I’m sure most of them already considered moving from TD’s when rates fell from 7% to 6% to 5% to 4%…