With the economy growing at a slower tick than previously expected, the South African Reserve Bank recently took a decision to lower interest rates. At 8.5%, the lowest interest rate in several decades, the prime lending rate has been reduced in order to encourage economic growth an assist South African businesses who find they are facing challenging times. However, one group of people may not benefit from low interest rates: retired people who rely on money market funds for their monthly incomes.
Are Pensioners at Risk?
The first half of 2012 has proven difficult for retired South Africans whose funds are held in money market accounts: the average annual return on these accounts has been 5.47%, failing to keep up with inflation which is expected to be 5.5% this year. According to Old Mutual Investment Group’s Wynand Gouws, this poor performance may place many pensioners at risk of realising zero or negative returns as the value of their funds is eroded by inflation.
Who is Affected the Most?
Naturally, if you are currently retired or approaching retirement age the current situation with interest rates and money market investments will be of concern. Even if retirement is a distant prospect for you, the value of any funds you may have invested in money market accounts may not be keeping pace with inflation, meaning that you may end up retiring with less capital than you had been expecting in years or decades from now.
How to Beat the Interest Rate Cycle
You may need to discuss the following options and others with your financial advisor:
- Pensioners and people retiring soon need to ensure that they break even each month by limiting expenses and avoid eating into their capital if at all possible.
- Funds currently held in money-market accounts may need to be moved to investments which offer higher returns without massive risk – interest-plus accounts are one possibility.
Investors who are several years or decades away from retirement should consider keeping less of their funds in money-market accounts, opting for investments which will preserve the value of their investments by beating inflation.