Snout and about... a good rate helps bring home the bacon. Photo: Tanya Lake
IF THE economists and analysts are correct, in two days' time we'll be looking at another interest-rate cut from the Reserve Bank. Millions of Australian home owners will feel relief on an expected 0.25 percentage point cut, but spare a thought for the millions who rely on the yield of cash assets to fund their retirements.
These people will be going into uncertain territory if the cash rate drops to 3 per cent; they'll be left to wonder how far the cash rate will fall in 2013 and whether they can live on these decreasing yields.
The average interest rate on bank deposits and term deposits was 3.5 per cent at October 2012, according to the RBA. If we agree that underlying inflation is running at about 2 per cent, those living on cash yields are already vulnerable, even before this week's supposed rate cut.
Depositors have fewer choices than mortgage borrowers. Borrowers have income from their labour, which they use to fund a mortgage. They have cash flow independent of the banking system.
The retiree depositors do not work. Their income derives from the yield on the assets they have accumulated during their working lives. Their cash flow from deposits is entirely dependent on the workings of the banking system and the decisions of the Reserve Bank.
But depositors have one thing going for them: the banks need their money because it is cheaper than sourcing it from the capital markets. So the banks will compete for those deposits with good rates. You just have to be prepared to look and to act.
What can retirees do when they live on cash yields? I'd start by being active about where your money is and how much it is earning. Make a habit of reading financial media, and going to comparison sites such as Canstar and RateCity.
Look around and see what's out there; some of the best term rates are on 90-day deposits, which turn over four times a year. So it pays to be more active about finding the best returns for your money.
Investigate your current savings account. Get in the habit of reading the bank ''rate boards'' in the newspapers, or looking at the interest rates on the bank's website. There, each week, the banks list their headline rates for fixed-rate and standard variable mortgages, and their rates on savings accounts, cash management accounts and term deposits.
If the rate offered on your savings account is dropping, look for higher-paying alternatives. Don't worry about having to leave the comfort of your own bank, because your bank may already offer a higher-yielding money market account that goes by a name you are unaware of.
If your bank isn't keeping up with the market on rates, look online at some of the online savings institutions that generally have better rates than retail banks.
Given all the new names of these cash deposits, what do they do and what should you be looking for?
There are four main categories that cash investors can use (government and corporate bonds are wholesale markets).
Savings accounts: They pay low rates that are variable, have transactional capability at ATMs and branches, and are capital-guaranteed by the government.
Cash management/savings maximiser accounts: They pay higher rates than savings accounts but are also variable; they often lure people in with "honeymoon'' rates for four to six months, are commonly online-only, and usually have rules about how many deposits and/or withdrawals can be made each month, limiting their transactional capability. Also capital guaranteed by the government.
Term deposits: These pay higher rates than savings accounts (Westpac's 90-day term deposit is 4.3 per cent; ING's 180-day is 4.5 per cent); they are fixed rate and fixed term, so you cannot withdraw the money during the investment period, but they are capital-guaranteed by the government.
Bond funds: These invest in the corporate and government bond markets, and earn higher yields than term deposits, with very low risk; they pay retrospectively variable rates (same as a managed fund).
This last one is something to think about. Several organisations offer investment in the bond markets. The drawback is that when you want your money out, it can take three to four working days to clear into your account. Still, these products are low risk and are producing yields well above 5 per cent in an asset that has had excellent yields over the medium and long term.
Your best way forward is to see an adviser. But if you can't, commit to being more active with your cash investments. You can't control interest rates, but you can decide where your money is invested.
If you're a retiree or pre-retiree who is concerned about what will happen with your savings, I want to hear from you. Email me at firstname.lastname@example.org.
Mark Bouris is executive chairman of Yellow Brick Road Wealth Management. See ybr.com.au.