Can you live on interest?

Published September 7, 2021, 6:30 AM

by George S. Chua

We all know that most of us will have to retire at some point in time as we get older or when we become unable to keep on working.  Unfortunately for most of us, relying on our social security to tide us over in our golden years will not be enough, which is why may retirees end up with a downgraded lifestyle, living on hand-outs or on whatever savings they have accumulated through their many years of hard work.

Inflation really eats up into your savings when the inflation rate is higher than your net return on investment.  As an example, the average inflation rate for the first semester of 2021 is at 4.4% and the average savings account in the Philippines earned about 0.30% per annum less the 20% withholding tax the our government imposes on interest on deposit.  What this means is that your money is now worth 4.16% less than it was a year ago!

At this rate you will definitely not be able to live on interest.  However, there are other alternatives to keeping your money in a savings account in the bank.  There are a number of options that may provide you with a higher rate of return than 4.4%, but remember, these alternatives do have some risks involved.  The shorter your investment horizon, the higher the risk you take.

Investing in stocks and bonds, is an option preferred by many savvy investors who are more sophisticated and experienced.  Stocks are also referred to as equities and come in a whole range of risk and volatility, much like bonds which are also known as fixed income securities that also come with varying degrees of risks and return. 

Normally with these investment alternatives, the higher the return you get, the more risk you take.  Let us just focus on getting rates of returns that will be higher than the inflation rate with little risk of default.  For equities, you may want to consider the new category of stocks called Real Estate Investment Trust (REIT) which are required to declare at least 90% of their distributable income as cash dividends.  So far, all of them are providing a dividend yield of more than the inflation rate and the dividends are declared at least every quarter.  While there is some stock price volatility, if you just hold for the yield, you should be ok.

For fixed income securities, there are a number of long term bonds that provide yields better than the inflation rate.  Just choose investment grade bonds to reduce your risk of default.  As a retiree, your investment objective should be to preserve capital rather than a higher yield.  Due to your situation, you cannot afford to compromise your nest egg to try to get a higher yield.

As a buffer to the net interest rate differential, finding ways to increase the amount you save is also a key element to a financially successful retirement.  It always best to make the sacrifice when you are younger than when you are in the twilight of your years.  You can certainly live on interest if you have saved enough and know where to put your money in!

 (The views and comments of the author are his own and not of the newspaper or FINEX.  Comments may be sent to [email protected])

 
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