Written For The Australian - How retirees can keep the good cash times rolling
by James GerrardFri Sep 13 2024
Retirees, enjoy the cash party while it lasts — because the DJ is packing up.
Right now, some high-interest bank accounts are paying north of 5 per cent, and private credit funds are dangling yields as high as 10 per cent. You have to rewind to 2008 to find a time when parking money in cash felt this rewarding. But with the futures market pricing even odds of an RBA rate cut by Christmas, and economists lining up further cuts through 2025, the window is closing.
Here's the problem I keep pointing out to clients: a 3.5 per cent five-year term deposit sounds fine until you subtract inflation and tax. If the RBA gets inflation back to 2.5 per cent, your real return could easily be negative. So what are the alternatives?
Pengana's new TermPlus product is getting attention, offering 7.35 per cent for one year up to 8.5 per cent for five. It's not a term deposit, though — your money flows into a global private credit fund in the Cayman Islands, the rate is variable, and there's no government guarantee. Investors should expect one to two negative years over a 20-year horizon. Not a deal-breaker, but you need to understand exactly what you're buying.
For something simpler, Challenger's five-year fixed term annuity pays 4.55 per cent, backed by an A-rated ASX-listed company rather than the federal guarantee. And for those willing to embrace some capital movement, Betashares' AGVT government bond ETF benefits when rates fall — for every 1 per cent cut, expect around a 7.6 per cent lift in value. It's already up nearly 5 per cent since July.
My take? A 3.5 per cent guaranteed term deposit is the benchmark. Anything above it comes with trade-offs. As Buffett said, "Risk comes from not knowing what you're doing." Never invest in something you can't explain back to yourself in plain English.