Australian interest rates are at a record low following last week's RBA decision to drop the benchmark rate to just 2%. For Australia's retirees or workers nearing retirement age, this means that a planned switch to defensive, income producing assets like term deposits simply won't produce the income required to fund pension payments.
Financial product comparison website www.canstar.com.au produced the following interest rates for a term deposit of $100,000.
| Period (Months) | Rate |
| 1 | 2.85% |
| 3 | 3.10% |
| 6 | 3.10% |
| 9 | 3.05% |
| 12 | 3.15% |
| 24 | 3.30% |
| 36 | 3.50% |
| 48 | 3.50% |
| 60 | 3.60% |
The 5% Rule
The old rule used to be that for every $100,000 of income you needed in retirement, you should target net assets of $2 million, implying a 5% yield. The table above clearly shows that retirees who based their last 20 years of saving on that principal will now be struggling to pay the bills! Even on a 12-month term deposit, investors will receive only $63,000 in income, 37% less than planned.
The Only Option
The gradual fall in term deposit interest rates has pushed more and more retirees and investors into growth assets such as shares and property to produce the income required to fund the retirement lifestyle they planned for. Property can yield strongly but has higher holding and purchase/disposal costs, making liquid shares an extremely attractive option.
Following last week's 3% fall in the ASX 200, a number of quality income options are now available to investors:
- Coca-Cola Amatil Ltd (ASX: CCL), Australia's distributor of Coca-Cola, Molton Coors beers and Beam-branded beverages is forecast to yield as much as 4.3% fully franked in the 2016 financial year.
- Woolworths Limited (ASX: WOW) shares have been smashed as investors become increasingly concerned over competition, however the share price fall represents an opportunity to benefit from its dividend yield, which has jumped to 5.1% fully franked.
- Telstra Corporation Ltd (ASX: TLS) shares have come back from a high of nearly $7 to trade at $6.15, implying a yield of 5% fully franked! Profit growth is expected to come from Asia as the group targets one third of group revenues from the region by 2020.
- Sky Network Television Ltd (ASX: SKT) shares also pulled back last week but the company remains New Zealand's dominant pay-tv provider. There are no franking credits as tax is paid in New Zealand but the company is yielding a healthy 4.7%, which analysts forecast to grow in years ahead.
