JUNE 21, 1998 : Fist full of Australian dollars, 21/06/98. Pic Rob Baird. Money / Note / Notes
JUNE 21, 1998 : Fist full of Australian dollars, 21/06/98. Pic Rob Baird. Money / Note / Notes

Rate cut pain for retirees, savers

Australians with mortgages are in a happy place but interest rates are causing the generations either side of them plenty of financial pain.

Young first home savers and retirees relying on cash in the bank for income have watched interest paid on bank deposits plunge from 6.5 per cent to below 1.5 per cent in less than a decade.

Financial specialists say these age groups' life stages are limiting their options when it comes to rates, and warn that now is not the time to chase higher incomes.

Financial strategist Theo Marinis said a big lesson for retirees was to stay diversified rather than be ultraconservative and hold only cash deposits.

"If you have a diversified portfolio, the fact that cash isn't doing very well doesn't really matter," he said. "If you're not diversified, ask yourself why."

A dollar in the bank today earns much less than it used to.
A dollar in the bank today earns much less than it used to.

Many retirees switched completely to cash when the 2008-09 Global Financial Crisis halved the value of share portfolios, but Mr Marinis said those who remained diversified had averaged 7-8 per cent annual returns long term.

"People got out in the GFC because they were getting 6-7 per cent on bank term deposits," he said.

Now deposits are close to 1 per cent, but swapping them to shares, property or other growth assets is dangerous right now because many asset prices are over-inflated.

"One per cent is looking sick but if markets fall and you get minus-five or minus-10 per cent it will look pretty good by comparison," Mr Marinis said.

"A correction is going to happen at some time."

Mr Marinis said people saving for a home deposit could consider other options rather than chasing quick cash from risky assets. The First Home Super Saver scheme lets people use superannuation's lower-tax environment to save for a home, while the First Home Loan Deposit Scheme - starting in January - uses a government guarantee that allows people to buy a home with just a 5 per cent deposit.

Someone with a two or three year time frame before they need their money for a deposit should not have risky investments.

Midsec managing partner Nick Loxton said "anything could happen" in three years.

"We are in a world that we haven't seen before," he said.

Mr Loxton said some clients had been complaining that too much of their money was placed in cash.

"Yes, we understand cash is about 1 per cent, but it's better than minus-20," he said.

"We're in a world where a lot of things look to be overvalued. People aren't thinking about how much they're bidding up the price of things just to chase yield."

Mr Loxton said there were still some investment opportunities around "but generally speaking you need to be careful".

He said people should seek advice if unsure, and savers and retirees should not expect high returns in a low-rate environment.

"It frustrates me that people will say, 'We used to get 10 or 11 per cent'," he said. "Yes, but inflation was high then."

@keanemoney