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Tuesday, June 19, 2012

Time to re-think your cash savings?

In light of all the economic uncertainty we’ve experienced since the start of the global financial crisis, it’s not surprising that many investors, particularly those close to or in retirement, are settling for low-risk options for their retirement savings. It’s one of the main reasons we’ve seen such a large transfer of money from shares to term deposits and savings accounts in recent years.

This strategy may less attractive following the Reserve Bank of Australia’s (RBA) recent cut to the official cash rate.

The RBA’s rate cut of 0.50%, investors are likely to see reduced returns from their term deposits and cash savings over the coming months, and potentially longer. This is likely to concern many investors, particularly those who are relying on their money to fund a retirement that could last up to thirty years or more.

The main issue for cash investors, as interest rates reduce, is that their money becomes less effective at protecting against inflation.

Term deposits and cash savings generally don’t keep up with inflation over time, so the purchasing power of your money could reduce. This might mean that you don’t end up with the money you need to achieve your financial goals.

For that, you generally need some exposure to growth assets such as property and shares. While they are more volatile than cash, they offer the potential for higher returns over the long term.

Often investors have this perception that investing in growth assets is inherently risky, but these days there are investment options that allow cautious investors to earn competitive returns, yet still be well-placed to take advantage of opportunities that arise as markets recover.

For example, many superannuation funds offer a viable alternative to term deposits in the form of conservative investment options. Importantly, your money remains within the superannuation environment, which is a tax effective way of saving for retirement.

By investing conservatively through superannuation or your pension you get the safety you’re looking for as well as a tax-effective return. Superannuation earnings are taxed at a maximum of 15% and earnings on pension assets are tax free.

Of course, super is only suitable for retirement savings as your money cannot be accessed until you meet a condition of release such as permanent retirement, but there are also non-super options.

Other conservative investment options can include defensive share funds that target high regular income with lower volatility than the overall sharemarket. This approach helps to provide better capital protection should the sharemarket fall.

These options may be welcome news for investors who are concerned about volatility but keen to get more out of their investments. Everyone’s situation is different so it’s important to get financial advice that’s relevant to your specific needs and objectives.

Ultimately, the right strategy will come down to how much money you need to enjoy your retirement, how long you have to invest it and how much risk you are willing to take. A financial adviser can help you understand the various strategies available to reduce the impact of volatility whilst still focusing on growth opportunities and quality returns.

For further information contact Hugh Kilpatrick from RIadvice-RetireInvest on 03 94671 0080.

*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This editorial does not consider your personal circumstances and is of a general nature only. You must not act on the information provided without first obtaining professional financial advice specific to your circumstances.

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