Retirement becomes riskier

Workers planning to retire will need to take more financial risks than those who retired a decade ago. Reserve Bank of Australia Governor Glenn Stevens said the call of global central banks to cut interest rates and stimulate economies was squeezing returns on low-risk investments such as term deposits.

Unprecedented low levels on official global interest rates has meant yields have collapsed on many traditional sources of income for retirees and in many countries, yields have even become negative so investors are paying borrowers.

For the next wave of retirees, that means the likelihood of having to pursue riskier assets to meet income expectations.

And the cost of buying a future income stream, whether bonds, shares, real estate or other investments, has gone up.

“Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot,” Mr Stevens said. “Those seeking to make that purchase now – that is, those on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago.”

He said they would have to accept a lot more risk to generate the expected flow of future income they wanted.

Mr Stevens said the problem was more acute in Europe, which had negative sovereign yields in some countries, but was also “potentially non-trivial” in Australia.

He said investment yields were the “lowest ever in human history” and it would take  time for rates to return to levels seen before the global financial crisis.

“It will be quite an adjustment to get back to that world and it seems to be quite slow in coming,” he said.

Meanwhile, quarterly household budget figures reveal that couples aspiring to a modest retirement lifestyle will need $33,766 a year, or $58,364 to be comfortable.

That equates to $1122 a week or just $6 less than the average pre-tax weekly pay packet of the Australian worker.

Jeremy Cooper, a superannuation industry veteran and Challenger’s retirement income chairman, told the Australian Financial Review that even those retiring with $1 million were in for a shock.

He estimated that $1 million, in the current interest rate environment, would fetch about $1297 a fortnight, the same as the government pension.