How retired Australians can help their income keep pace
On the face of it, rising interest rates should be a plus for retirees. But as Chris Paton, chief investment officer of La Trobe Financial, explains, the challenge lies with inflation.
Even before the conflict we're seeing in the Middle East and the associated disruptions to oil supply and petrol prices, inflation was persistent and well above the RBA's target range of 2% to 3%.
Australians are feeling the impact of rising prices in their hip pockets, and this has more serious implications for retirees and others who rely on investments for income.
We're already seeing prices rise across many areas - not just fuel, and the Reserve Bank of Australia (RBA) is warning inflation could surge above 5.0% this year.
This has the potential to leave retirees considerably worse off, particularly if their income is fixed, and not responsive to inflation.
High inflation erodes the value of returns
Inflation is already sitting at 3.7%, which has fuelled recent rate hikes, and while it's easy to assume higher interest rates are a plus for retirees, this doesn't paint the full picture.
Inflation reduces 'real' (after-inflation) investment returns. Put simply, the income you receive buys less than it used to.
Think of it this way.
Right now, it may be possible to earn around 5.0% on bank deposits. This may sound attractive. However, when we allow for inflation of 3.7%, the 'real' return drops to 1.3%.
It doesn't end there.
The Association of Super Funds of Australia (ASFA) says retirees are facing "higher inflation than the general population" because they spend more on essentials that have risen fastest.
This can be a real problem for retirees whose income streams are not indexed to keep pace with rising prices.
Those on a pension are not immune. As ASFA notes, the age pension has failed to keep pace with the cost increases retirees face.
The upshot is that high inflation can leave retirees financially squeezed - even when interest rates are rising.
In response, retirees may feel they only have two options - cut back spending, or dip into precious capital to maintain their lifestyle.
But there is another alternative that is often underutilised by Australians retirees. The solution can lie with diversification into established, income-generating investments such as credit.
Credit - low volatility, a shield against inflation
Credit simply refers to lending; it can be public (from a bank) or private (from investors). It's an asset class that has grown significantly in recent years, and as an income-generating investment, it can play a valuable role for retirees, especially when inflation is high.
Mortgages are a common form of credit and, similar to bank loans, the majority of mortgages involve a floating-rate that adjusts in line with interest rates. This may provide investors into these mortgage funds (known as mortgage schemes in the past) better rate protection than, say, other fixed-rate investments.
In addition, mortgages can be a source of predictable income when well managed in a diversified portfolio.
Investments into a mortgage scheme are not government guaranteed and they are not bank deposits. However, the returns can be attractive.
Inflation-responsive returns
As a guide to returns, La Trobe Financial's 12 Month Investment Account, recognised by Money magazine as Australia's Best Private Credit Fund - Mortgages for 17 consecutive years has a consistent track record of performance across market cycles.*
It not only gives investors competitive, inflation-responsive returns underpinned by mortgage assets back by Australian property, but the 12 Month Investment Account is also designed to provide regular monthly income.
In this way, retirees can be confident the investment aims to support a healthy 'real' return, while still having a reliable income.
With a track record spanning 70 years, La Trobe Financial has navigated the full spectrum of economic conditions and unexpected market events. This, combined with disciplined management, is giving Australians planning for retirement or already enjoying it, the opportunity to live their best life, the reassurance of income that's outpacing inflation.
If you're seeking a durable, inflation-responsive income solutions, contact the La Trobe Financial team on 1800 818 818 or visit latrobefinancial.com.au and find out more.
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 Australian Financial Services Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important that you consider the Product Disclosure Statement (PDS) before deciding whether to invest or continue to invest in any of the funds. The PDSs and Target Market Determinations are available on La Trobe Financial's website.
*Past Performance is not a reliable indicator of future performance
Any Financial product advice is general only and has been prepared without considering your objectives, financial situation or needs. You should, before investing or continuing to invest in the La Trobe Australian Credit Fund, consider the appropriateness of the advice having regard to your objectives, financial situation or needs and consider the PDS for the fund.
When considering whether to invest or continue investing in the La Trobe Australian Credit Fund, you should be aware that (1) an investment in the fund is not a term deposit, and your investment is not covered by the Australian Government's deposit guarantee scheme. Investing in the fund has a higher level of risk compared to investing in a term deposit issued by a bank and (2) there are other risks associated with an investment in the fund. The key risks of investing in the fund are explained in section 9 of the PDS, available on our website.
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