MONEY | How to exist in a low-interest-rate environment: why changing banks to chase rates can be a mug's game

 Learning how to exist in a low interest rate environment. Picture: Shutterstock.
Learning how to exist in a low interest rate environment. Picture: Shutterstock.

Recently the Reserve Bank dropped interest rates even further. To make matters worse for retirees, there are hints the next move is also likely to be down, not up.

Consequently I have been receiving a flood of emails from readers asking where they could find the best bank interest rates on their deposits.

There are two major issues here. The first is finding the best rates, and the second is solving the problem of how to exist in a low-interest-rate environment.

To find the best rate I suggest you search online using websites such as Finder, Canstar and RateCity. At the date of writing this, the best I could find was 1.50 per cent from Judo Bank for a three-year term, but keep in mind that rates change continually in the light of the bank's cash position on the day.

Furthermore, many so-called honeymoon rates may be good for six months and then revert to the bank's normal rate. There may also be special conditions. Right now, my wife has an at-call account with St George Bank, which pays a face rate of 0.20 per cent, but moves up to 0.70 per cent if she deposits at least $50 a month.

But the bigger picture here is the role of cash in your portfolio. If you are extremely nervous, and have total financial assets of say $200,000, a difference of 0.5 per cent is only worth $1000 a year to you. That's not much in the scheme of things. And changing banks continually to grab an extra 0.5 per cent is a mug's game - you will pay more than you save by incurring extra fees and possibly a loss of interest while funds are being cleared.

If the sum is bigger, it is not prudent to keep your whole portfolio in cash. Let's face it - cash is the most expensive asset class you can own as it's selling at 100 times earnings.

The obvious solution is to seek financial advice about a balanced portfolio, or simply do it yourself and put the best part of your money in an index fund such as Vanguard Australian Shares Index, which currently has a yield of around 4.5 per cent. The cream on the cake is that the yield is mostly franked, so if you are retired with a tax-free income, you will get all the franking credits back. This would take an effective yield to close to over six per cent. Full details are given in my new book Retirement Made Simple.

I appreciate that shares are volatile, but by definition an index cannot go broke, and the index fund should keep on paying the dividends irrespective of the normal ups and downs of the share price, and you don't need to outlay a massive sum.

Let's say you were rather risk adverse, and your financial assets were $300,000 all in cash. You could simply leave $250,000 in cash, and put your toe in the water by investing $50,000 in an index fund. That huge cash buffer would give you time to ride out any falls in stock market, and the investment in the index fund would give you great experience with shares.

Of course, if you're on the pension and are asset tested, every $10,000 you spend returns the equivalent of 7.8 per cent per annum via a reduction in assessable assets. So instead of chasing an extra 0.05 per cent on your $200,000 cash portfolio, you could simply spend $15,000 on a trip, or home renovations and get an immediate increase in your pension of $1170 a year. That's more fun than chasing a few more basis points on your term deposit.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au