Retirement Life
14 November 2022
Low interest rates are better for all
“Go on, Adrian Orr, raise them again. And again, and again. Actually, as much as you like and for as long as it takes. Let it rip – as far as we’re concerned, just raise those interest rates!”
That’s not the call you hear in the media today, but in the past, it was the kind of thing you would hear from cheerleading retirees as they exhorted the reserve bank to increase interest rates. Retirees mostly invested in term deposits a few decades ago, and they wanted and needed interest rates to be as high as possible.
For every person who borrows from a bank (e.g. a mortgage), there is someone else lending to the bank (a depositor), and their positions are diametrically opposed. The borrower wants rates as low as possible, while the lender wants them high. The borrower wants cheap debt to save money; the lender wants a decent return.
These different positions often came down to age: most of those who were borrowing (whether their home mortgage, for the business, their credit card or for a consumer item) were younger people growing their wealth or funding their lifestyles as cheaply as possible.
In their thirties and forties (and maybe beyond), they wanted cheap credit to be easy (they still do).
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On the other side, many of the people who make term deposits (or other interest-bearing investments) are in retirement. In the past at least, many retirees made their term deposits with the bank (or some other similar investment) with the idea being to live on the interest payments. The quality of their retirement depended on getting a decent interest rate.
In their sixties and seventies (and beyond), they wanted a good return after tax and inflation.
Today, the two sides are not as opposed as they once were. Because investment has changed so much, lower interest rates are in nearly everyone’s interest. There are certainly people who have significant investments in term deposits and the like, but not so many that are completely dependent on them as there were.
Fewer people now rely solely on term deposits for income in their retirement. People are often in retirement for a very long period of time (a 65-year-old woman can expect to live to nearly 90). To make the money last for 25 years, they need better returns, and there are far better investment options for them than depositing their money for interest.
Most older investors now have a diversified portfolio, whether that is through Lifetime Retirement Income Fund, a managed fund or a personalised bespoke portfolio. Whether you have that portfolio managed or are self-managed, the chances are you have exposure to all the main asset classes (shares, listed property, fixed interest and cash). This not only gives better net returns than term deposits (a very low base!) but also covers people from all of the adversities which might befall the economy over the several decades which make up retirement.
Most of the investments in this portfolio or fund benefit from low and stable interest rates – it is no longer in retirees’ interest for the central banks to put up interest rates. Shares, property, and fixed interest all do better if interest rates are low and do poorly when interest rates rise (cash may do better if interest rates rise, but that should be a relatively small proportion of a retiree’s portfolio).
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Companies (including property companies) usually carry some debt, and when rates rise, this adds to the costs and reduces profitability. Moreover, a lift in interest rates means that shares and property become relatively less attractive, leading to a fall in share prices.
Just like younger people with mortgages and debt, older people should now want low interest rates – their interests are aligned. No need to cajole the RBNZ Governor – low rates will benefit the majority of people.
Of course, no one wants inflation. Younger people now realise what a scourge inflation is (they learn that lesson every time they go to the supermarket), and older people know inflation’s cost from the last time we had it. Higher interest rates are bad for all of us, but they are something we will all have to suffer together to tame inflation.
Written by:
Martin Hawes
Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.
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