Yesterday’s decision by the RBA to leave the cash rate unchanged at 3.0% came as little surprise. And whilst the bank’s low inflation forecast may offer some re-assurance to those planning their retirement; the reality is when planning finances long term there are no guarantees that the level of inflation won’t change and subsequently impact your nest egg. With this in mind we asked guest writer Anthony Fensom for tips on boosting your retirement savings.
Protecting your retirement savings from rising inflation can be challenging in the current low interest rate environment.
Consumer prices rose at an annual rate of 2 per cent in the September quarter 2012, with ABS data showing health costs increased 7.2 per cent, education 6.1 per cent and insurance 2.3 per cent, although food prices dropped 1.1 per cent.
Current bank deposit rates of around 4 to 5 per cent equate to a real return (after inflation) of just 2 to 3 per cent a year, and with official rates tipped to go lower this year the gap may shrink further.
While cash may be a safer investment than property or shares, increasing money printing by governments around the world to boost economic growth may see inflation spike higher, benefiting borrowers but costing savers.
What then are some alternative options for boosting retirement savings?
Australia’s share market has had a rocky few years, with the All Ordinaries Index dropping 11.3 per cent in the year to June 30. However, over the 20 years to June 2012, shares outperformed other investments.
According to a study by Russell Investments and the Australian Securities Exchange (ASX), Australian shares gained an average of 9.2 per cent a year after taxes and expenses over this period, compared to an 8.2 per cent gain for residential property, 6.5 per cent for bonds and 3.5 per cent for cash.
Many analysts suggest buying bank stocks with high dividend yields, which together with capital growth can produce superior returns. Other infrastructure-linked shares, such as utilities, may offer protection as their income is typically linked to inflation.
However, if you are nervous about buying shares, an easier option is to invest in a managed fund where a professional fund manager makes the decisions.
Bricks and mortar
“As safe as bricks and mortar” is a common expression, and if you like being able to touch and feel your investments then property is for you. The same survey by Russell Investments and the ASX showing strong 20-year returns for shares also showed that property outperformed the others over the past 10 years.
While housing prices have dipped recently, signs are emerging of a pick-up in activity driven by lower interest rates and strong employment, as well as a growing population.
If you still have a mortgage, paying it off will deliver a risk-free return of 7 per cent or more, depending on the interest rate. For those needing funds, it’s also possible to use a reverse mortgage loan to tap the equity in your home, or alternatively sell and downsize to a smaller property.
More liquid than property, bonds can offer protection against inflation as well as delivering capital growth.
According to Gavin Madson of FIIG Securities, it is important for investors to diversify into different asset classes, and a well-diversified portfolio that includes an allocation to bonds should provide more reliable returns and income.
“One rule of thumb is to invest your age in fixed income, which includes an allocation to cash, since as you grow older, you should be increasingly concerned with the maintenance of your nest egg.”
Madson said corporate inflation-linked bonds were currently offering returns around 4 per cent higher than inflation and from “some of the strongest infrastructure assets in Australia”.
Hedge with gold
Gold prices have been on the rise over the past year, with investors seeking protection in the traditional hedge against inflation.
According to some analysts, the gold price may reach US$2000 an ounce within months and even US$3000 by early 2014, helped by the US Federal Reserve’s easy money, demand for gold jewellery from countries such as India, and increased buying by central banks.
For retirees seeking even more investment spice, other alternatives include short-selling hedge funds, which seek to perform well during downturns, or investing in art, movies or startup businesses.
“Don’t put all your eggs in one basket” is a worthwhile recommendation, and it is best to pursue a diversified portfolio, but one with some growth assets to protect your retirement savings.