Ask Paul: Term deposit interest is insulting but what's the alternative?


I am 91 and my wife is in her mid-80s.

She is conservatively inclined in regard to her funds but has become progressively depressed as to how to retain the integrity of her capital.

In the past few years she has taken some pride in playing one bank term deposit offer against another to get the best return for her money.

paul clitheroe

However, she now views the scene as one where her capital is being eroded and the interest she receives as absurdly small, even insultingly small.

Her two deposits together would be about $100,000. Could you suggest alternatives in the circumstances of the COVID-19-influenced economic climate? - Peter

Peter, I really feel for you and your wife.

A term deposit is an ideal investment for a retiree. It is safe, accessible based on the maturity date you chose and not as complex as property or shares.

But today, as you say, the returns are downright awful and do not keep pace with inflation, let alone pay you anything meaningful.

The problem is I cannot direct you to other investments without more risk.

An income fund, which could be a mix of government bonds, property and listed shares, would be likely to offer an income return of 3% to 5%. That sounds good, but there is the risk of these investments going backwards,
at least in the short to medium term.

So the problem we have is that you and your wife have access to a myriad of higher-performing investments, but they carry more risk.

Maybe one idea is to take a small amount of her term deposits and try a higher-risk investment such as an income fund, but my overriding concern is any stress this may cause. I believe a test of any investment is whether you sleep well at night with it.

My preference is always a diversified investment portfolio. I feel that is the best long-term investment solution for any retiree, but this is a very personal decision based on how we feel living with risk.

We should not ignore the fact that a term deposit is, at current interest rates, a risk in its own right. It will not preserve capital. This reinforces my argument for diversification.

Please pass my regards to your wife. I really appreciate how difficult this low-interest-rate climate is for retirees. Like her, my wife and I also look sadly at the returns on the money we have in term deposits.

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Paul Clitheroe AM is a respected financial adviser and Money's founder and editorial adviser. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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