Interest rates - why focus only on borrowers?

[Julia]

The overwhelming majority of retirees live on the pension, so they're immune from interest rates. That will probably change over the coming years but at the moment self-funded retirees are a small miniority of Australians. The average retiree, retires with something like ~$150k in superannuation. Hardly a nest-egg.
http://www.abs.gov.au/auss [/QUOTE...ent. More than the ABC seems able to manage.

 

[Ves]

Plenty who are partly self funded, however, who will be affected.
Also younger people who are trying to save.

Yes - affected by their own decisions. This happens at this time of the business cycle. And will continue to keep happening. Yet people always act surprised and cry poor. You would think they would learn!!!

 

[Julia]

Yes - affected by their own decisions. This happens at this time of the business cycle. And will continue to keep happening. Yet people always act surprised and cry poor. You would think they would learn!!!

I've about given up on that idealistic notion.

You might be being a bit unreasonable, however. I haven't heard anyone 'acting surprised', just a few people pointing out that it's not all positive when rates go down.

Further, many people are profoundly irritated by Wayne Swan's joyful recognition of the rate cut and the ridiculous way he claims it has happened because the economy is so strong, with an anticipated surplus, whereas a couple of years ago he was decrying the same 3% as an 'emergency level' which denoted a crisis!

So maybe don't misinterpret irritation as surprise.

 

[Calliope]

Did Swan actually say he is not concerned about self funded retirees and others dependent on floating interest rates? Can't believe even he would be so foolish as to dis such a large group. Do you have a link to his remarks?

Only about a third of the population has mortgages. Far more have money as savings.

No he didn't. Politicians never say what they are really thinking. I used the cartoonist's trick of having him uttering his real thoughts after I listened to him on the ABC once again berating the banks for short-changing the "working family" mortgagors.

 

[Ves]

So maybe don't misinterpret irritation as surprise.

Maybe so. Some of the comments on the bottom of the articles on the major news site were certainly full of irritation and victim mentality (ie. "why are they punishing us?"). I could be confusing "surprise" something else.

 

[McLovin]

Maybe so. Some of the comments on the bottom of the articles on the major news site were certainly full of irritation and victim mentality (ie. "why are they punishing us?"). I could be confusing "surprise" something else.

A bank account is a store of value, IMO. It should hold it's value relative to inflation but that's about all. IMO, using a bank interest (and even worse, at call interest) as a primary source of income is very risky. You're completely at the mercy of the economic cycle. Sometimes it seems as though many retirees (not on here, but what you hear on the news, read etc) are looking for a risk free investment that offers upside but no downside.

 

[Julia]

A bank account is a store of value, IMO. It should hold it's value relative to inflation but that's about all. IMO, using a bank interest (and even worse, at call interest) as a primary source of income is very risky. You're completely at the mercy of the economic cycle. Sometimes it seems as though many retirees (not on here, but what you hear on the news, read etc) are looking for a risk free investment that offers upside but no downside.

Sure. A bit like those who buy shares for that oh so reliable dividend yield and are devastated when they lose capital because the SP actually goes down.

Regarding interest as primary source of income being risky, why, if you've locked in an interest rate which delivers net about twice as much as one needs to live on?

 

[McLovin]

Sure. A bit like those who buy shares for that oh so reliable dividend yield and are devastated when they lose capital because the SP actually goes down.

Hardly. I was actually thinking about fixed income. Before this round of cuts, 10 and 15 year yields were over 4.5%. NSW TCorp was at almost 5%. How many retirees utislised the ability to lock in income for long periods?

 

[Ves]

Regarding interest as primary source of income being risky, why, if you've locked in an interest rate which delivers net about twice as much as one needs to live on?

People in this position are the minority and they have obviously done really well to get there. They have scope to do lots of things to protect their income and capital.

But the strategy that you suggested worked really, really well for those who did it in the US five or six years ago.

BUT now those who used it are learning about a thing called "reinvestment risk." They won't lose their capital (until they have to start drawing on it), but they won't have a source of income either.

It is not uncommon for rates locked in for five years to go from 8% to 2%. So if they had double the income at 8%, then they have just enough at 4%. Then 2% they only have half as much as they actually need...

Don't laugh, because it's a story that is fast coming to Australia IMO. We will be earning next to nothing in interest within five years.

 

[McLovin]

People in this position are the minority and they have obviously done really well to get there. They have scope to do lots of things to protect their income and capital.

Yes and we seem to be getting into smaller and smaller groups of people. As you say, this would be a very small portion of the population, we're talking about people with >$1m in savings.

But the strategy that you suggested worked really, really well for those who did it in the US five or six years ago.

BUT now those who used it are learning about a thing called "reinvestment risk." They won't lose their capital (until they have to start drawing on it), but they won't have a source of income either.

It is not uncommon for rates locked in for five years to go from 8% to 2%. So if they had double the income at 8%, then they have just enough at 4%. Then 2% they only have half as much as they actually need...

Don't laugh, because it's a story that is fast coming to Australia IMO. We will be earning next to nothing in interest within five years.

And this is what I mean. You should be looking to lock in over 10+ years if you intend to live off interest income, so that your income remains unchanged through the cycle. If the credit boom of the last thirty years produced an anomaly in interest rates, then we might need to all get used to sub 5% rates.

Also what are the penalties on five year term deposits if, say, inflation spiked and you had to withdraw after three years to preserve capital?

 

[Julia]

Hardly. I was actually thinking about fixed income. Before this round of cuts, 10 and 15 year yields were over 4.5%. NSW TCorp was at almost 5%. How many retirees utislised the ability to lock in income for long periods?

No idea. It's not my responsibility to monitor what other people do.

You and Ves seem to have the idea that, if someone chooses to go to cash for reasons best understood by themselvesit is with the intention of being thus locked in to cash for ever after.

Do you seriously think I don't realise that reinvestment conditions could be very different in a few years time?
Of course I do. It could also be that the rate cycle has turned and rates are on the way up again.

I have already said that with funds that are at call, once that 5% becomes 4.75% that will be my trigger point to stir myself into re-entry to the share market. Not because it's financially necessary but on principle.

Consider that you may be looking at a retiree's situation through the filter of your own younger situation.
Some retirees have 'enough'. I'm not going to be specific for obvious reasons, but even if I lived to be very old (grandmother finally departed at 103), I wouldn't exactly be worried about being dependent on a government pension. I spent many years working hard to make money, but only for the purpose of providing a carefully calculated level of security. I'm not driven to keep on making more and more money. Have never been into money for its own sake.

I don't actually enjoy owning shares, watching the market, making sure I'm on top of all that's happening.
Would much rather be on the beach with my dog, gardening, out with friends.

So perhaps try to recognise that different folk have different aspirations and different needs, rather than assuming they are too stupid to understand potential reinvestment environments.

 

[McLovin]

You and Ves seem to have the idea that, if someone chooses to go to cash for reasons best understood by themselvesit is with the intention of being thus locked in to cash for ever after.

Do you seriously think I don't realise that reinvestment conditions could be very different in a few years time?
Of course I do. It could also be that the rate cycle has turned and rates are on the way up again.

I have already said that with funds that are at call, once that 5% becomes 4.75% that will be my trigger point to stir myself into re-entry to the share market. Not because it's financially necessary but on principle.

Your first paragraph no, I was not implying that at all. I've been arguing the merits of whether holding cash forever is wise, IMO, it's not.

On your second and third paragraphs, I'm not sure when this became a discussion about your investment decisions. I haven't mentioned you once and that wasn't my intention to have a dig at you. What you or anyone else does with their money doesn't really interest me.

I made a couple of statements that if one intends to live solely off interest income then they should lock in a rate that will run right through a business cycle. That's my opinion. Otherwise, they're living with high fixed costs and an income stream that will vary according to the economy.

I don't actually enjoy owning shares, watching the market, making sure I'm on top of all that's happening.
Would much rather be on the beach with my dog, gardening, out with friends.

So perhaps try to recognise that different folk have different aspirations and different needs, rather than assuming they are too stupid to understand potential reinvestment environments.

Again, I haven't said anything about the sharemarket, you introduced it to the discussion with your comment about dividends. All I said, is that if someone is retiring and planning to live solely off interest on their savings, they are better trying to fix their income for as long a period as possible. This has nothing to do with growing their pie, it's about realising that as they age a substantial amount of their living expenses will be fixed, so they'd be far better, IMO, taking a lower fixed income than a possibly temporarily higher variable one.

 

[medicowallet]

I have already said that with funds that are at call, once that 5% becomes 4.75% that will be my trigger point to stir myself into re-entry to the share market. Not because it's financially necessary but on principle.

Almost identical triggers for me..

I re-entered into some shares for yield a couple months back, and it seems that they are doing well with potentially people moving the same also, probably should have got on the Telstra boat at the beginning of the year, but missed that one!


I wouldn't be surprised to see a bounce in high dividend yield shares, with the confidence in housing wavering, I guess time will tell.

In saying that, i am sticking mostly to cash for the moment.

 

[Julia]

Your first paragraph no, I was not implying that at all. I've been arguing the merits of whether holding cash forever is wise, IMO, it's not.

I don't know where you got the idea that holding cash forever was a favoured strategy by anyone. I've never seen such a reference. Agree totally that it would be foolish.

On your second and third paragraphs, I'm not sure when this became a discussion about your investment decisions. I haven't mentioned you once

I was responding to your saying:

You should be looking to lock in over 10+ years if you intend to live off interest income, so that your income remains unchanged through the cycle.

I cannot speak for others so used my own situation as an example. I don't know why you insist the interest rate cycle is 10+ years? In April 2009 the cash rate was 3%. It rose to 8%. It is now, less than four years later, back to 3%.
So I don't understand your insistence that rates need to be locked in for 10+ years.

We don't know what will happen in the next few years. We could be at the bottom of the rate cycle or rates could have further to fall.

I made a couple of statements that if one intends to live solely off interest income then they should lock in a rate that will run right through a business cycle.

As above. I may be missing something when it comes to what you say is the relationship between interest rates and the business cycle.

You also asked

Also what are the penalties on five year term deposits if, say, inflation spiked and you had to withdraw after three years to preserve capital?

They are very considerable indeed. Which is why I always place deposits in multiples of just $50K each.
Also, there is always several years' living expenses at call so the possibility of having to break any term deposit is remote.

Again, I haven't said anything about the sharemarket, you introduced it to the discussion with your comment about dividends.

Yes, in a reference to those many people who buy shares for their yield and then find in a downturn they have lost in capital many times what that yield has provided. I suggested that such a strategy is less than useful and for many people the preservation of capital via guaranteed capital is preferable.

All I said, is that if someone is retiring and planning to live solely off interest on their savings, they are better trying to fix their income for as long a period as possible.

And all I have said is that I doubt many people adopt such a strategy as anything other than a temporary protection of capital whilst enjoying a passive income. Depending on age and financial situation, many people will prefer to avoid the fluctuations of the volatile share market, and opt for cash until some stability occurs.

I understand your point about fixing income for as long a period as possible, but regard it as perhaps rather flawed, given the unpredictable nature of the interest rate cycle as pointed to above.

That said, I'll be surprised if we don't see low interest rates for a fairly sustained period now given all the circumstances.

 

[Ves]

I don't know where you got the idea that holding cash forever was a favoured strategy by anyone. I've never seen such a reference. Agree totally that it would be foolish.

Really? My partner is an ex-assistant bank manager. She said they're a dime a dozen. I see lots of them in my own vocation too.

I thought that McLovin made some excellent points, myself.

I've lost track about what you two are arguing about - it seems you agree??

Julia - would you have done better or worse jumping on the gold or silver bandwagon in 2007 (or earlier) when it was trending? Is it part of your market timing strategy?

 

[Julia]

I've lost track about what you two are arguing about - it seems you agree??

Essentially, yes. (I think)

I'm just trying, perhaps incompetently given how unsuccessful I seem to be, to suggest that not everyone is driven by the desire or need to make more and more money, and that for some people, in some circumstances, a passive approach for a time is preferable to worrying about what the market in anything might be doing.

Julia - would you have done better or worse jumping on the gold or silver bandwagon in 2007 (or earlier) when it was trending? Is it part of your market timing strategy?

This sort of question is what I'm trying to explain above. I don't know how further to make you understand that some people - after years of striving to achieve a given target - are simply not driven to "do better".

 

[McLovin]

Essentially, yes. (I think)

I'm just trying, perhaps incompetently given how unsuccessful I seem to be, to suggest that not everyone is driven by the desire or need to make more and more money, and that for some people, in some circumstances, a passive approach for a time is preferable to worrying about what the market in anything might be doing.

I think there was some misunderstanding initially, regarding length of time in spent in cash and that led to the confusion. But now I understand, I think we're broadly in agreement

Regarding interest rate cycles and business cycles. They definiately to not need to be 10 years long, you'd hope they'd be shorter. Having as long a time period as possible gives one some flexibility on reinvestment.

Julia, you might be interested to know that in the US retirees are almost completely invested in bonds with very little (0-20%) in equities. The reverse of here. I think most planners there would be aghast if they saw the level of equity investment many retirees have here that's been sold to them as being "safe blue chips".

 

[Julia]

Julia, you might be interested to know that in the US retirees are almost completely invested in bonds with very little (0-20%) in equities. The reverse of here. I think most planners there would be aghast if they saw the level of equity investment many retirees have here that's been sold to them as being "safe blue chips".

That is interesting. What's the return like on those bonds?

What do you think is behind the overweight position in equities here?
I'm not sure if it's derived via people investing directly in shares or is it rather people being advised into managed funds of equities?
In the latter case, then perhaps adviser commissions have a role?

Rabodirect have today sent out the following email:

As you probably know, on 4 December 2012, the Reserve Bank of Australia (RBA) dropped the official cash rate. And although it's not what you want to hear, we're dropping our standard variable rates by 0.30%.

There is good news though, as a loyal customer you'll continue to get the bonus rate of
5.16%p.a.* on 'new money' you put into your High Interest Savings Account (HISA) until 31 January 2013. This is a whopping 2.16% above the RBA's cash rate.

Wow, down .30%. The claim by the banks that they are under pressure because of a 'deposit war' is starting to look a bit thin.

 

[McLovin]

That is interesting. What's the return like on those bonds?

What do you think is behind the overweight position in equities here?
I'm not sure if it's derived via people investing directly in shares or is it rather people being advised into managed funds of equities?
In the latter case, then perhaps adviser commissions have a role?

Couple of things...

1) Non means tested pension payments; Warren Buffett and Bill Gates are eligible for the pension in the US. And they wonder why they're running out of money!

2) The availability of long dated inflation protected treasuries. At retirement a retiree can buy a 30 year inflation adjusting US treasury. They won't lose purchasing power and they likely will never have to worry about reinvestment risk. It's actually a really good product.

As for returns, well they were once good; 4-5%. The 10 year is now down around 1.6% and the 30 year is about 2.75%, moving out a bit, AAA corporates are around 3.25%.

I don't think advisors have much of a role in the preference. It is an interesting difference between Australia and the US.

 

[craft]

2) The availability of long dated inflation protected treasuries. At retirement a retiree can buy a 30 year inflation adjusting US treasury. They won't lose purchasing power and they likely will never have to worry about reinvestment risk. It's actually a really good product.

Aus has a Sep 2030 CPIadjusted Govt bond - yields about 0.9% at the moment.