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The low interest rate environment has made it difficult to seek risk-free returns, making life difficult for retirees who put their savings in fixed deposit (FD) instruments to obtain returns.
While interest rates have been on a downward trend globally, especially in more developed economies, the trend appears to have popularized in Malaysia.
“I can find that some banks are still offering up to 2.25% per annum for a longer tenure of the placement,” said one retiree.
Another retiree said that Malaysia once had an advantage with its higher FD rates compared to more advanced economies like Singapore, which explains why people had preferred to spend their golden years in Malaysia.
But it appears that this advantage is now diminishing with the rapid pace of interest rate cuts that have occurred this year.
The overnight policy rate (OPR) drop started this year and accelerated as the Covid-19 pandemic spread.
The fall in interest rates is significant. Just at this point, a year ago, the OPR stood at 3%.
Then the OPR was lowered several times in early 2020, with the first cut coming in late January, a cut to 2.75%.
The OPR is now at 1.75% (almost half of what it was a year ago) and economists already expect another 25 basis point reduction in September.
The CEO of the Center for Socio-Economic Research, Lee Heng Guie (pictured below), told StarBiz that retirees who have been relying on FD returns would face the dilemma of seeking higher returns now.
“Contrary to conventional advice, some may have invested their savings in the stock market.
“It’s best to look for stocks that generate fundamentally strong dividends, but it is not a risk-free investment instrument,” Lee said.
In particular, stock valuations are elevated now and any abrupt change or increase in volatility could cause these savings to suffer or disappear altogether.
“Retirees should be cautious when seeking profit, as they must also protect their life savings,” Lee said.
For others, they may have a more diversified passive income stream, such as investment properties, as they rent out their properties to pay for expenses.
Lee said there may be some who can sell their houses and buy a smaller space, as there was no longer a need for such a large space.
“For some, their children no longer live with them, so they may not see the need for such a big house.
“So what they do is monetize the profits by selling the house and use the profits to support themselves,” he said.
The government recently announced the issuance of a sukuk called Sukuk Prihatin, an investment instrument compatible with the syariah.
The sukuk can be subscribed with a minimum of RM500 with a profit rate of 2% per annum for two years.
Lee said that the fact that the government is issuing these bonds at a rate of 2% and that the government is guaranteed was a sign that interest rates could remain at these levels for at least the next two years.
“This can also be a good instrument to consider if people are looking for higher returns.
“But at those times, you may also need to tap into your savings fund,” he said.
He said pensioners would be less affected as they would have a constant and predictable monthly income from their pension.
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