Sharp rise in living costs for retirees and employees could force investors into higher yielding assets
A rise in living costs as revealed by new data from the Australian Bureau of Statistics today could force retirees and other investors to seek higher returns from fixed income assets outside of term deposits, which are generally yielding less than 5% p.a.. An example is private credit investments, which could benefit from further rate rises, according to Tim Keith, Managing Director of private credit fund manager and non-bank lender, Capspace.
The ABS publishes a series of Selected Living Cost Indexes (LCIs)[1], or inflation figures by household type. The Employee LCI rose 6.2% in the second quarter of 2024 from a year earlier, while the Pensioner and beneficiary LCI rose 4.1%. The Age pensioner LCI rose 3.7%, while the Self-funded retiree LCI rose 3.8% from a year earlier.
Employee households recorded the largest increase in living costs of all household types, as they are the most impacted by rising mortgage interest charges, the ABS said. A significant difference between the Living Cost Indexes and the CPI is that the Living Cost Indexes include mortgage interest costs rather than the cost of building new dwellings which is covered in the CPI.
According to Mr Keith, another interest rate rise is still on the cards after the Reserve Bank of Australia said this week that inflation is too high because demand is still too strong and inflation is expected to take longer to return to the central bank’s 2% to 3% target.
“With sticky inflation, Australians close to retirement should be devoting more of their investment portfolios to fixed income assets such as private credit to boost the real return on their assets, otherwise known as the return after inflation, which currently sits at 3.8%,” Mr Keith said.
“The rise in living costs could force investors out of cash into higher yielding assets. For savers, returns have improved dramatically given the rise in interest rates in the past two years, which will support investors in everyday living and in retirement. Private credit investments, or returns on corporate loans, have benefited from higher rates given rates on such loans are typically linked to official interest rates.
“So arguably retirees’ investment strategies and those of self-managed superannuation funds should consider diversification into private credit investments, which can deliver investors yields close to 10% per annum, well above the returns on bank term deposits or online savings accounts, which in June generally sat at less than 5% p.a.,[3]” Mr Keith said.
“Investors’ capital has protection based on the stringent loan process, lending and compliance policies, along with the security taken over borrower assets,” said Mr Keith.
“That is an important point. More defensive assets such as fixed income, and private credit particularly, may deliver more attractive yields than residential property, cash or fully-franked shares. That’s a key detail because it is income-yielding assets that will support Australians in everyday living and in retirement.”
Its important for investors to consider that not all private credit funds are the same, and that before investing they are satisfied that the fund manager has a stringent loan qualification process, excess protection for investors via mortgage security, adequate liquidity and is transparent with investors on the loan portfolio they manage within the private credit fund.
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