Friday, 9 July 2010

Investing for 70 year olds - 7.25% term deposit

My parents sometimes ask me about the choices available for investing their retirement funds, and I've previously told them about investing in index funds as an alternative to cash or bond funds. However, they have never been very comfortable with the ups and downs of the stock market, and since they are now both in their 70s, investing in the stock market for potentially higher returns compared to a term deposit doeesn't seem particularly suitable. After all, they can get 7.25% pa for a five year term deposit (min $25,000) invested with Citibank with relatively low risk (the main risk being a period of high inflation and higher rates becomming available - but at the moment it appears that rates may be close to a peak), and since they will be consuming all their investment over the coming decade or two, there isn't really enough time for compounding of any extra return obtained from investing in the stock market to significantly increase the total amount available to spend.

Aside from the peace-of-mind provided by the predictable interest payments and return of capital provided by fixed term investments, it also makes budgeting a lot simpler - although my parents are loath to prepare a budget and tend to just put everything on their credit card and get a rude shock every month when the bill arrives.

I told my dad about the Citibank TD but he has already invested their liquid funds (around $400,000) in a 7 month TD with their credit union at 7.00%. I have suggested that he 'ladders' his TD investments so he has some investment maturing every month, rather the investing the entire lump sum at one time (especially if he invests in a five year TD). It will be interesting to see what rates are available in 4-5 months when he needs to rollover his current investment. When I first drafted this post a couple of weeks ago Citibank was offering a 12-month TD for $10,000 minimum at 7.15%. That offer appears to have been replaced by the five year TD, and with a 6-month TD only offering 6.35% pa.

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1 comment:

Bankstown Bloke said...

Terms deposits are great for retirees who cannot invest in growth assets. At least they get a reliable income and know that their capital is stable. If I didn't have mortgage I would be putting money in a high interest at-call cash account right now given the uncertainty in the Australian share and real estate markets.