After spending what feels like an eternity in a high-rate environment, interest rates are finally coming down.
And while mortgage holders breathe a sigh of relief, retirees may face a different reality: lower rates - and the resulting dip in income - threaten their retirement nest eggs and, ultimately, their financial freedom.
Lower interest rates can shrink the returns on fixed-income assets such as term deposits and bonds — key components of a stable retirement portfolio. For those retirees who rely primarily on interest from these fixed-term assets as a source of retirement income, it may result in a shortfall.
To compensate for this shortfall, many retirees make unwanted adjustments: spend less, live more frugally or dip into savings. Others seek riskier investments in search of higher returns, potentially increasing their exposure to market volatility. Either way, retirees must rethink how they generate retirement income.
The 'double threat': inflation and low interest rates
Another threat is inflation, which drives up the cost of living, stretching retirees' budgets thinner than ever and jeopardising the ability to maintain a desired retirement lifestyle.
Interest rates and inflation often go hand in hand; costs go up while income goes down, creating a gap that can erode savings - delivering a 'one-two punch' to financial confidence. Even modest inflation can chip away at your purchasing power, making it more expensive for everyday essentials such as groceries, utilities and healthcare.
If your retirement income does not keep pace, your dollar simply will not stretch as far as it used to.
Strategies for optimising financial confidence in retirement
Protecting your nest egg in a falling interest rate environment requires a thoughtful approach that balances safety, income and growth.
Diversify
When interest rates are low, relying solely on cash or fixed-income investments may lead to losses in real terms, as declining returns fail to keep up with rising costs.
For this reason, a diversified portfolio is essential. It's important to explore other strategies — including investments that offer growth potential — to protect your financial security.
Consider lifetime income products
New, innovative lifetime income products are now available which provide financial certainty and confidence for retirees.
True to their name, lifetime income products offer a guaranteed income for life, unaffected by inflation or declining interest rates.
Your financial adviser can help you assess your income needs and create a plan that strikes the right balance between safety, income and long-term growth.
How lifetime income products can increase financial confidence
Lifetime income products offer a stable, predictable income stream that:
- delivers income certainty by paying a guaranteed income for life
- provides the opportunity for continued investment growth while being protected from market volatility
- allows access to money whenever required to meet unforeseen expenses; and
- creates confidence knowing you can maintain your desired lifestyle in retirement.
Most importantly, lifetime income products remove the worry of outliving one's savings, ensuring financial security - even in a low-interest-rate environment.