Glenn Stevens, RBA governor, stirred up the retirement community last week by flagging the fact that generating enough retirement income in a world of historically low yields would be a ‘nontrivial’ challenge for all concerned. “The key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets are so low?” asked. “This is a global question. Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot … Those seeking to make that purchase now, that is, those on the brink of leaving the workforce, are in a much worse position than those who made it a decade ago.”
In such a world of low interest rates, do fixed interest investment still offer the safety and security for retirees that they once did? Bearing in mind that CPI for the year to the end of March 2015 was 1.3 per cent, is it still possible for investors and savers to secure a reasonable retirement income from the fixed income investments available?
Term deposits
Research from YieldReport suggests that parking $1m in the highest paying 12-month term deposit, from Baa3-rated Bank of Baroda, would pay a yield of 3.70 per cent, which would yield a weekly gross income of $711. The best 12-month term deposit from one of the big four banks, NAB, for a 12-month period would yield 2.70 per cent or $519 gross income per week.
Cash ETFs
Another option open to investors would be to look at investing in a cash ETF, the BetaShares Australia High Interest Cash ETF that delivered a return of 3.29 per cent for the 12 months to the end of March 2015. Past performance is not guarantee of future returns but a return of 3.29 per cent would deliver a gross return to investors of $632 per week for every $1m invested over a 12-month period.