2021 turned out to be much better than many had feared. Interest rates stayed down, property and share markets boomed and lockdowns appear to be a thing of the past. And 2022 is shaping up well, as border restrictions come down, international travel resumes and economic activity speeds up.
There is certain to be a federal election but I doubt that anything proposed will be harmful to retirees. Labor learnt its lesson in 2019 when it tried to abolish the refunding of franking credits and has now retreated to a much less controversial platform. Let’s face it, retirees are our fastest growing demographic and their voice will continue to get stronger.
In any event, 2021 saw major enhancements to the retirement income sector.
Lifetime income products, which are designed to maximise the Age Pension, became popular. Because only 60 per cent of the sum invested counts for the assets test, these products can be a great tool for retirees who are not too far over the Age Pension assets test cut-off point, or for those already assets tested who wish to increase their Age Pension and receive a lifetime income stream at the same time.
The Pension Loans Scheme has been rebranded as the Home Equity Access Scheme because the original name gave the impression this reverse mortgage product was not available to self-funded retirees. The interest rate has been reduced to 3.95 per cent, and there is a lump sum option as well as the normal fortnightly drawdowns. This will be a great product used in the right circumstances.
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The Retirement Income Covenant also made the news. At its core, the proposed covenant will require trustees to formulate, review regularly and give effect to a retirement income strategy for the retired members of their super fund and for members approaching retirement.
The strategy must outline how the trustee intends to assist its members to:
- maximise their retirement income (taking into account the Age Pension and any other relevant income support payments such as social security payments or veteran entitlements)
- manage the risks to the sustainability and stability of their retirement income, including the risk of outliving savings and investment risks at different stages of retirement and
- have some flexible access to savings during retirement (e.g. to meet health costs or buy a new car).
The wild card is the direction of interest rates. There are two views in economic circles about where inflation is going and what the central banks should do about it.
It was simpler in the ‘good old days’. The economy would boom, inflation would become rampant, the central bank would exercise a combination of a credit squeeze and a rate rise and, lo and behold, enter ‘the recession we had to have’.
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Things are much more complex today. Even before COVID hit, interest rates were at record lows in most countries. Then, when COVID hit, governments printed trillions of dollars of money to protect their economies. The result was that the asset prices went crazy and further widened the gap between the haves and the have-nots.
But booming asset prices were not the end of it. Thanks to a combination of COVID and a relentless move to drive the world to renewables irrespective of the cost, we now have massive shortages, which, of course, drive up prices.
A classic example is the link between gas prices, which are soaring, and the shortage of nitrogen-based fertiliser. In the European Union, they are facing a fertiliser crisis that may become a food crisis. The rising price of gas, combined with the shortage of urea, drives up food prices.
There is no doubt that inflation is rampant. In Australia, builders cannot complete houses because they can’t get materials, restaurant owners are paying huge sums to get staff, it takes months to get a car, and food prices are going crazy. On top of that, petrol prices have been at record highs.
The Reserve Bank is between a rock and a hard place. The purpose of increasing interest rates is to slow the economy, but this inflation has been caused by lack of supply not by excess demand. Therefore, I don’t see rates moving much over the next two years. This shouldn’t worry retirees because a rate rise of 50 basis points wouldn’t do a thing to assist those who have chosen to ignore superannuation and live off bank interest.
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But there are two issues troubling me. The first is the growing pressure on households. The factors mentioned above are bad enough but, to make it worse, over the holidays many households would have become carried away with the excitement of reuniting with their loved ones and spent up big. The hangover will have set in now, with school fees and credit card bills coming in and may get worse later in the year if interest rates start rising.
The other worrying feature is the growing percentage of Australians, especially younger ones, trading cryptocurrencies. There have even been headlines about young people trading in an attempt to get a house deposit. A key problem with trading is that it is essentially gambling, and it’s highly addictive. Psychologists claim the hit you get from a successful share trade is remarkably similar to the hit from injecting drugs.
Charlie Munger, Warren Buffett’s business partner, summed it up perfectly when he said, “In the modern world, people are trying to teach you to come in and trade actively in stocks. Well, I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin.”
To make it worse, crypto provides a fertile field for scammers. I play Words with Friends for relaxation and am now finding more and more invitations to play from very attractive young women who live in Texas and who can’t wait to start a conversation about bitcoin. Many people will fall for it. Another issue for cryptocurrencies is there is no consumer protection available. If you lose your Bitcoin password, you have lost your Bitcoin – there is no head office you can ring to recover your password. If you sign up with a dud website and lose all your money, the government won’t come to your aid. Buying Bitcoin is caveat emptor: there’s no protection, or safety net, or recourse.
Are you confident any new policies announced before the federal election will be kind to older Australians? Have you dabbled in cryptocurrencies? Why not share your views in the comments section below?
Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Go to Noel’s website for more news and views.
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