People planning to retire at the end of this year received a bit of apparent good news last week. Interest rates are now not likely to fall much further. Investing in bank deposits for income is likely to be more rewarding than had been anticipated. 

The Australian Bureau of Statistics announced that inflation, the CPI, had unexpectedly jumped from 2.1 per cent in the year to June, to 3.2 per cent in the year to September. That is a big rise and pours cold water on talk of further interest rate cuts any time soon.  

The RBA confirmed that on Tuesday. Rates will have to stay where they are for the foreseeable future to keep downward pressure on inflation. Many analysts have said interest rate cuts appear to be over for quite a while. Some have even suggested rates may have to go back up.

The transition from having a salary to depending on investment returns for income is nerve wracking for many new retirees. A good interest rate at the bank is very reassuring.

However, bank deposits are not a suitable investment for money that needs to generate income to live on long term. That is even more so when inflation is high. Retirement investments need to appreciate to keep up with inflation.

Suppose a term deposit offers 4 per cent for twelve months and inflation is 3.2 per cent. If the interest is reinvested the real gain is just 0.8 per cent. However most retirees must spend the interest paying their living costs. So they lose 3.2 per cent of their purchasing power annually.

Most retirees don’t pay tax but pre-retirees saving for retirement usually do pay income tax on their interest, so they too end up losing money on their fixed deposits.

Retirees need to invest the majority of their long-term retirement capital in things that will grow in value with inflation. That means investments backed by property, shares and infrastructure.

Some may think that higher borrowing costs would mean these assets would experience weak demand and therefore declining values. They would be wrong. When inflation is elevated assets in limited supply such as property and shares increase in value.

Investing in property and share based areas adds more uncertainty for new retirees as these things provide unpredictable returns. However they provide much higher returns long term.

The most practical investments for retirees are account-based pensions. Within them the majority of capital can be invested in growth assets such as shares and property, with a lesser amount retained in defensive, stable areas in case of a market fall. Professional retirement planning advice can help.