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Active Retirees : Active Retirees Aug-Sept
42 | www.probussouthpacific.org FINANCE 42 | www.probussouthpacific.org Rates can vary widely between banks and even within a bank for different periods. MORE INFORMATION CANSTAR CANNEX publishes term deposit interest rates from 30 days through to five years, and from $1000 to $250,000. W:www.canstar.com.au INFOCHOICE provides comparisons of thousands of products from hundreds of banks, building societies, insurance brokers, lenders and more. W: www.infochoice.com.au Of course, it’s always best to talk to your financial adviser about your particular circumstances before making a decision. Retirees can shop around on the internet for the best deals. Canstar Cannex’s website, for example, publishes rates for ter m deposits of 30 days up to five years for most banks and financial institutions. Lock it in The main downside of ter m deposits is their lack of liquidity – if you need the money urgently then you will pay steep penalties to take it out. The penalties vary and include reduced interest payments. For this reason, most financial planners don’t advocate having all your funds in ter m deposits and advise keeping some money in regular cash accounts. Peter Arnold, financial analyst at Canstar, warns that while term deposits are fairly simple, there are traps for the unwary, particularly relating to when the term deposit period ends or ‘rolls over’. Your bank will generally contact you by email or letter before the roll over date. If you don’t advise them what to do your account could automatically be rolled over into a new term deposit and, if the bank is no longer chasing deposits for that term, the interest rate may have fallen. For example, you might have initially invested in a two-year ter m deposit paying six per cent interest, but, at the end of the two years, be automatically rolled over into another two-year ter m deposit paying just five per cent. Don’t bet the farm Morien says term deposits can offer a respectable return for the conservative parts of the portfolio and can therefore be an alternative to some of the bond fund exposure. Bonds do have their advantages, including liquidity and potential for capital gains, though they can also suffer capital losses. Stephen Hart, director of planner services at FIIG Securities, said bonds typically pay higher returns. “But they’re difficult to access by retail investors,” he said. Michael Hutton, a financial planning partner at HLB Mann Judd, said the main benefit of term deposits is that investors can’t lose their capital. He says term deposits are also an excellent way for retirees to manage and map out the next few yeas of pension payments. Hutton suggests having the next four or so years of pension payments in ter m deposits. Next year’s pension would be in a one- year ter m deposit, the following year’s in a two-year ter m deposit, and so on. As a general rule, he says it’s ideal for retirees to live on five per cent of their fund balance per year. So you might have four term deposits, each of five per cent of the portfolio, for a total term deposit investment of 20 per cent of the portfolio. The remainder of the portfolio, according to Hutton, could then be in bonds and shares in a bid to generate a higher return, while four years’ pension is safe and sound in ter m deposits. “We’re very keen for retirees to have next year’s pension ready to go into their cash account,” Hutton said. “One of the biggest problems through the financial crisis was people selling off assets at reduced values to meet pension payments. “Putting a series of future pension payments in something such as a term deposit takes a lot of stress out of the equation.” ••
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