Every time interest rates fall, borrowers breathe a sigh of relief. Mortgages, car loans, and business financing become more affordable, fueling growth and economic activity. But in the excitement of lower borrowing costs, another consequence goes largely unnoticed.
There’s a less obvious impact—one that doesn’t grab attention but gradually unfolds in the background, affecting people in ways they might not expect.
As the Reserve Bank of Australia (RBA) signals a potential cut in interest rates, retirees and savers across the nation are facing a financial conundrum.
With over $1.571 trillion in household deposits resting in the hands of Australian banks, the implications of a reduced cash rate could be significant, particularly for the 4.2 million retirees who often rely on interest from savings as a key source of income.
The convenience of earning interest on savings accounts and term deposits has long been a pillar of financial security for many Australians, especially those who have left the workforce.
However, the forecasted interest rate cut by the RBA, which would be the first in more than a year, is set to shake the foundations of this security. While mortgage holders may breathe a sigh of relief as their repayment burdens lighten, savers are bracing for the impact on their income.
In anticipation of the RBA’s move, major banks such as NAB and Commonwealth Bank have already begun to adjust their savings rates, with reductions of up to 0.20 and 0.15 per cent respectively. This preemptive action serves as a stark warning for savers to reassess their financial strategies.
Ron Hodge, CEO of InvestSMART Group, has highlighted the dichotomy of the situation, noting that while some home loan borrowers may find a financial lifeline in lower rates, the same cannot be said for those without mortgages and retirees. The latter group, which constitutes 32 per cent of Australian homeowners, may find their financial flexibility increasingly ‘limiting.’
The upcoming RBA board meeting, scheduled for 17 and 18 February, is expected to result in a 0.25 per cent cut to the cash rate, bringing it down to 4.10 per cent. This decision, influenced by easing inflation figures and a desire to stimulate economic activity, could lead to a monthly reduction of $115 on a $750,000 home loan if banks pass on the cut in full.
However, the flip side of this coin is the pressure on retirees and savers to seek alternative avenues for maintaining their income levels.
During the pandemic, we witnessed a similar scenario where the RBA’s dramatic rate cuts pushed many to consider riskier investments to achieve comparable returns.
‘The hunt for higher returns may see retirees and savers forced back into ‘risk on’ assets that come with higher levels of risk than they may be comfortable with, or investment terms that don’t suit their personal cash needs,’ said Hodge.
Currently, the most attractive high-interest savings accounts offer rates up to 5.60 per cent for a limited period from Rabobank, with ongoing rates around 5.50 per cent subject to certain conditions from ING, Ubank, MOVE, and BOQ.
For term deposits, options like Heartland Bank’s 9-month term at 5.05 per cent and Family First Bank’s 12-month term at the same rate are available. Judo Bank leads the longer-term rates, offering up to 4.70 per cent for two-year deposits.
InvestSMART advises savers to adopt a ‘steady, structured process’ when moving up the risk curve as interest rates decline. This could involve reallocating a portion of term deposit funds into high-quality, low-cost diversified ETFs.
‘A typical conservative ETF portfolio, with 70 per cent cash and bonds and 30 per cent property and equities would have returned around 7 per cent last year, with 3.4 per cent of that being returns to investors as income,’ said Hodge.
As we approach the RBA’s rate-cutting cycle, it’s crucial for deposit-reliant investors to consider portfolios that can meet their income needs without significantly increasing risk. Adjusting the allocation of funds across different asset classes to match personal life stages, interest rate cycles, and market conditions is a prudent strategy.
The RBA’s decision will be announced at 2.30pm on Tuesday, 18 February, and will be closely watched by economists and the public alike.
For our readers, particularly those among the 4.2 million retirees, it’s essential to stay informed and proactive. Review your savings and investment strategies, consult with financial advisors, and consider diversifying your portfolio to mitigate the impact of lower interest rates.
Your financial well-being may depend on the actions you take today to safeguard your savings against the tide of changing rates.
We invite you to share your experiences and strategies in the comments below. How are you preparing for the potential interest rate cuts? What measures are you taking to protect your savings and ensure a steady income stream? Your insights could be invaluable to fellow YourLifeChoices readers navigating these uncertain financial waters.
Also read: Australia’s second biggest lender announces good news for mortgage holders
Few banks are ”retiree friendly” anyway. Higher interest rates are usually either for a short 4 month introductory period, or conditional on no withdrawals or growing your balance every month. I have just left AMP Bank, which offered very good interest for a while, because they changed their policy to require the balance to grow every month. Retirees need to withdraw funds to live on and don’t want to grow their balance. They might save for short or medium term goals like a holiday or a home improvement project. Or just to have an emergency fund available.
Banks USE our money and profit from our deposits. They should treat retirees with more respect. Pay a decent rate of interest, unconditionally or with conditions that are reasonable (such as maintaining a minimum balance, or depositing regularly).
And it’s past time government reviewed the cruel assets test for pensioners which, in times of low interest, imposes unfairly on those just above the threshold – requiring them to drain their savings just to replace pension income and denying them any benefit for their years of hard work and sacrifice. While folk with quite high incomes still get a pension, and families earning over half a million a year get subsidised childcare, retirees with very modest savings have private incomes well under the level of the aged pension, and therefore a strong incentive to spend their savings and claim the OAP. Is this really good for the country? Wouldn’t a system that ensures those who saved well receive a secure living income from their savings in old age be better for the federal budget?
Savers do not help the economy, spenders do. Superannuation tax concessions cost the government more in lost revenue than it would cost to pay all the elderly the old age pension.
We retained a small nest egg on which we currently earn 4.8% interest and collect the full OAP.
IMO for most people you are better off spending your money while you can still enjoy doing so.
Savings accounts and term deposits are terrible investments for people to use for retirement income. They can’t pay rates which match inflation so are just slow ways to lose money.
They should only be used for short terms.
As the article suggested, retirement money needs to be invested in classes that have some growth assets. The suggested ETFs are great examples.
Agree with all.
However self funded retirees cop it twice.
Interest rate decline and deeming increase.
I am ill and thought I would check the agedcare means test costs.
Your house is added in the means test daily costs and it is increased to $200,000.
After my financial assets and income
I am paying the maximum fee per day so I might as well pay it myself and forget the govt.
The asset tests did me in not the income which really puts me in the low income assistance category.
The govt does not care about those people who have gone without to save money.
There is a point in super , when one is beyond 75 that super is cashed out to save dying withe a tax liability so it’s bank interest for risk free low interest.
Just saying
Industry superannuation funds pay much higher returns than any bank. Your savings are managed professionally with the returns being paid to members not shareholders.