Alternative asset classes offer consistent, reliable income for retirees as rates fall

Central banks, including the Reserve Bank of Australia (RBA), have started to lower interest rates, which impacts savings and, ultimately, those who rely on this income, such as retirees. This creates a challenge for securing consistent and reliable income. However, certain asset classes, such as listed infrastructure companies and high-yielding equities, present potential solutions for income generation.

Irene Goh, deputy global head of multi-asset at fund manager abrdn, says that in an environment where traditional cash deposits may no longer suffice, a diversified approach to income generation is essential for investors, especially those seeking income to support their retirement.

“Equities can be a valuable source of income. Australian equities, in particular, offer an attractive yield spread compared to global equities, enhanced by the franking credit system of taxation. Additionally, global high dividend equities and fixed income assets can contribute to income solutions too.

According to Ms Goh, investors should be seeking stable and consistent income through diversified income sources across global equity, global bond and listed alternatives.

“Listed alternatives are important as they can provide access to differentiated income streams with lower dependency on economic trends. These may include infrastructure, specialist property, precious metals, royalties, renewable energy, and special opportunities.

“We maintain a flexible asset allocation to stay nimble on equities, and we remain positive on duration assets such as bonds, and we also believe that investors should diversify risk through listed alternatives such as listed infrastructure companies as the returns from cash investments fall as central banks cut interest rates,” she said.

Ms Goh’s base case is for a soft landing in 2025, characterised by moderating economic growth and inflation slowly returning to targets in developed countries, thus allowing central banks to lower interest rates even further this year.

“We expect the US Federal Reserve will cut rates two more times in 2025, beginning in September. Further cuts from the European Central Bank and the Bank of England are also likely later this year as economic growth slows.

“We have identified income opportunities which are less sensitive to economic cycles such as renewable energy and infrastructure assets which can deliver income and is often linked to inflation, and less susceptible to any downturn in the economic cycle,” she said.

Ms Goh says that combining diversified asset allocation with proprietary stress tests is the key to generating sustainable income while minimising downside exposure.

“By strategically allocating to alternative asset classes and employing active management techniques, retirees can aim to achieve a consistent and reliable income stream in a low-rate environment. It is essential for retirees to consider a diversified approach that goes beyond traditional cash deposits to secure their income needs in the current economic climate, especially with cash rates falling in Australia and elsewhere,” she said.

At its February meeting, the Reserve Bank of Australia (RBA) lowered the cash rate target to 4.10 per cent from 4.35 per cent. With interest rates on online savings accounts now typically yielding less than 2 per cent, this exposes many savers to very low returns.

“Compared to inflation at around 2.5 per cent in January 2024, returns on bank online savings accounts are substantially lower, and averaged just 1.75 per cent in January 2025, down from over 2 per cent a year ago. Bank one-year term deposits rates averaged a little more at 3.35 per cent per annum, well below around 4 per cent a year earlier, so the real return on cash deposits is negligible.

“In an environment, where inflation could reignite given Trump’s tariffs, and interest rates could fall further on savings accounts in 2025, investors should be cautious about investing too much in cash and instead diversify their exposures into other assets such as equities, bonds and alternatives which can deliver reliable income,” said Ms Goh.