Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Cashed-up SMSFs fall foul of Reserve Bank rate cut
With ATO statistics showing SMSFs holding $162 billion – 16 per cent of their net assets – in cash and term deposits, there’s no prizes for guessing which cohort was less than enamoured of the Reserve Bank’s decision to shave 25 basis points off the cash rate last week – self-funded retirees.
The bank’s verdict on interest rates could impact cash investors hard, with many holding high levels of savings in term deposits and other cash accounts, with returns after inflation likely to drop towards zero or below, says Simon Arraj (pictured), founder and responsible manager of Vado Private.
“With interest rates on online savings accounts typically yielding less than two per cent, that exposes many savers to returns of less than zero.
“Compared with inflation around 2.5 per cent in December 2024, returns on bank online savings accounts are substantially lower, averaging just 1.75 per cent in January 2025, down from over two per cent a year ago. Savings rates could fall further this year after the February rate cut.”
He says that bank one-year term deposits rates averaged a little more at 3.35 per cent a year, well below an average four per cent a year earlier, so the real return on such deposits is less than one per cent.
“Investors would be wise to reassess high allocations to cash, especially in an environment where inflation could reignite given Trump’s tariffs and interest rates could fall further on savings accounts in 2025.”
He says retirement investors would be wise to re-examine their low allocations to fixed income investments, which were less than 1.8 per cent of all SMSF assets in the September 2024 quarter, compared with investing about 16 per cent of total assets under management in cash.
“Ideally, more capital should be allocated to fixed income, a defensive investment, with an allocation to private credit a consideration. The percentage of an investor’s portfolio in private credit depends on their goals, risk tolerance and investment horizon.”
Advice firm Wattle Partners’ Renato Manias says the onus was now on self-funded retirees to “shop around” as there were still some attractive returns on offer, despite last week’s rate cut.
“Term deposits (TDs) that are more than 90 days are already pricing-in lower rates later this year, so applying for a TD may be too late, but it’s worth looking at. There are also alternatives in the credit/debt markets, but these come with more risk than cash or TDs.”
Another option is growth assets that are more defensive in nature, says Wattle Partners’ Lauren Isles.
“One example would be large-cap, blue-chip Australian stocks that are paying a higher income yield in the form of fully franked dividends that can be more tax-effective. Obviously, they attract a higher level of market risk compared with TDs and fixed income securities, but less so than other assets that fall in the growth bucket,” she says.
Atchison Consultants’ Nick Hatzis says self-funded retirees can still lock in solid returns, but while this strategy preserves capital, it can erode purchasing power over time if inflation rises.
“Investors may need to balance security with some exposure to higher-yielding alternatives. Our advice to self-funded retirees is to build a diversified portfolio and not rely 100 per cent on defensive assets as they will miss out on higher average returns by negating growth assets.
“Investment-grade corporate bonds, high-yield credit funds and even private debt investments can offer higher returns, although they come with varying degrees of risk. Floating-rate securities, which adjust interest payments in response to rate changes, may also be worth considering as a hedge against inflation.”
Hatzis says that the return of Donald Trump to the White House adds another layer of complexity for investors to navigate.
“His policies, such as aggressive tariffs, deregulation and fiscal stimulus, could drive inflation higher, further eroding the real returns of cash and TDs. At the same time, heightened geopolitical tensions and trade restrictions could weigh on global growth, creating a challenging investment environment.
“For self-funded retirees, this means navigating a world where both inflation risk and economic uncertainty are heightened, making portfolio diversification and strategic asset allocation more critical than ever.”
