Prior to the last interest rate cut there were savings accounts and term deposits at 4%.
Now they look like around 3.5-3.7%.
Which is still higher than the Challenger quote of paying 1m for 33k (3.3%). You can keep your capital for 3.5% savings or term deposits, which are likely to be higher rates in the future as well.
Again, that figure of 3.3% is nowhere near enough information to base an opinion on. It doesn't even include the age or gender of the annuitant, and again whether or not there is a reversionary beneficiary. It's like trying to get prices for a new car and basing it on "Must have an engine." I'm not some annuity cheerleader that feels the need to swing in and defend them, but I do want genuine, useful information out there if people are going to use it to form opinions.
Current term deposit rates for 12 months paid at maturity are in the vicinity of 2.5 - 3%. You can't plan retirement on at-call savings accounts with bonus rates and introductory offers - there is no certainty, not to mention there are often modest deposit size limits with those incentives (less than 100k etc).
Try this site...
www.fiig.com.au
Indicative rates
at Monday 13 April
Wholesale investors only* Retail investors
Fixed rate bonds up to 6.54% up to 6.42%
Inflation linked bonds^ up to 5.39% up to 5.33%
5-bond portfolio up to 6.08% up to 5.47%
1 year term deposits# up to 3.00% up to 3.00%
Hi Triathlete, my sarcasm didn't translate very well across text. There is an enormous difference in terms of risk between cash and corporate bonds. I'm not sure what's included in those portfolios to get the 'up to' rates, but I'd put a wager on that it's not all federal government debt and bank deposits.
If you keep to the realms of sovereign debt for the sake of security, inflation linked bonds provide a point of difference to traditional government bonds. If you were to look at an ILB with a 15 year maturity in 2030, you're getting a 2.5% p.a. coupon paid quarterly indexed with CPI. Based on that bond, the price you are paying for what is now $112.43 face value is $149. That's a pretty rubbish yield of 0.317% p.a. ILBs trading near their adjusted face value are paying lovely coupons of 1 to 1.25% p.a. paid quarterly. Not much interest from me at this point in time.
Regular old government bonds will get you yields of 1.5 - 2.75% at present, and with record low interest rates if I were a retiree I would not be keen to pile in for the long haul to hold them until maturity - when rates rise people are going to eat a loss on them in the short term as market yields rise and they trade closer to or below face value.
Envetra 2025 ILB, SYD 2020 or 2030 ILB, G8 Education, JEM Southbank, Mackay Sugar, ElectraNet, Plenary Justice SA, are just a few companies with corporate bonds providing in excess of 4% yield, son in excess of 5%
AYF invests in various hybrids and offers aroudn 6.5% gross yield
MXUPA also offers over a 6% yield
EPX is currently offering 9% yield.
yes, it's riskier than keeping the money in cash, but if someone chooses to keep your money in cash when there's options providing a good deal more yield with not too great an increase in risk, then they need to accept the cost involved with their choice.
When you're talking about the risk free rate then jumping into corporate bonds and hybrids is a relatively great increase in risk. Terms on hybrids have gotten progressively worse for those taking them up in the chase for yield than the kind of offerings available pre-GFC. The conversion terms on most hybrids have gone from being instruments that truly made sense and you could get behind as an investment vehicle, offering a regular income with equity upside, to the current offerings where the conversion terms aren't based on the share price at issue but rather the share price at time of conversion - where's the equity upside compensation in that?
2 years of cash reserves would be adequate.
There will be no fixed ratio as people will have different requirements
For myself I'd be comfortable with bonds that cover my essentials and a bit more. That way I know I can survive the ups and downs of the markets. Inflation linked bonds will help to give you a real % income every quarter.
After that I'd be looking at some hybrids for extra yield and shares to provide a bit of growth. In the current market I'd be investing in foreign shares to hedge against a falling dollar and the likely better growth prospects of other economies relative to Australia.
I hate the financial repression going on with those in debt favoured over those lending, but I can't change it so I have to work within the system as it is. There's still plenty of opportunities that are providing a decent yield relative to the risk compared to a savings account.
You're right, there's no point bemoaning the woes of savers vs spenders. If we all saved the economy would be shafted as consumer spending drops. Our infinite growth dependent economic models require us to borrow, spend, consume, consolidate and repeat. It's not healthy, but we won't see much incentive given to savers. The real risk is exactly what's being documented in this thread - people cannot live off the income from low risk investments anymore and as a result are willing to accept growth asset risk that most can little afford to take.
Chris Joye has written a few columns about how hybrids are much riskier than they appear to be.
Absolutely. Haven't read their column but the carefree attitude many have towards hybrids, particularly perpetual notes, is not befitting the risks involved.
It feels like this will all end in tears again.