Term deposit alternatives + How much you REALLY need to retire

Happy Friday everyone,

The latest wages and unemployment data has topped the economic agenda this week (more on both shortly). As a result, money markets are indicating just a 10 per cent chance the RBA might cut interest rates at their last meeting of the year, on 10 December. They are also indicating a 28 per cent probability of a rate move at the following meeting, in February 2025. In fact, money markets see little chance of a rate cut until May 2025 - 73 per cent for a 0.25 per cent drop, and 100 per cent certainty of a cut in August 2025.

In this week’s newsletter:

• Unemployment is steady and jobs are still being created.

• Wages growth is slowing.

• Term deposit rates are slowing, but here are some alternatives.

• What to do with leftover travel currency?

• A flat month for superannuation returns.

• Trump win fires up the US sharemarket.

• Is your superannuation on track for retirement?

Unemployment steady, but still reasonable job growth

The strength of the Australian job market continues with another 15,900 jobs created and the unemployment rate staying at 4.1 per cent. But the number of new jobs are below the 25,000 predicted by most economists.

But it was good to see most of the gains were again in full-time employment with 9,700 jobs added in October. Would you believe 299,500 permanent jobs have been added to the economy so far this year? Pretty impressive. Plus there were 89,300 part-time jobs added.

According to CommSec, the growth in the working age population and participation rate have been the key drivers of the strength of Australia’s post-pandemic labour market.

Monthly population growth remained firm, lifting by 49,400 in October. Since June 2022, the labour force has swelled by 1,069,100 people and employment has lifted by 954,000 people through to October 2024.

Across Australian states and territories, the ACT had the lowest jobless rate in October at 3.1 per cent, possibly reflecting the skew in employment towards public sector-related jobs. The state election in Queensland in the final week of October appears to have led to an increase in hiring of workers. In fact, the Sunshine State added 38,000 jobs in October, making its unemployment rate of 3.9 per cent equal to its lowest since September 2023. Elsewhere, the Northern Territory had the highest jobless rate of 4.6 per cent, followed by Victoria at 4.5 per cent.

What slowing wages growth means

This post-pandemic ‘inflationary/rising rates economic period’ has seen a vicious cycle. One where high inflation, which is caused by supply chain disruptions, leads to demand for higher wages to meet the rising costs. This, in turn, feeds more rising cost inflation and the need to keep interest rates high.

The issue has been how to break the cycle.

Goods inflation has been easing as supply chains have returned to normal. But the Reserve Bank constantly points to the sticky ‘services’ inflation which is keeping the CPI and interest rates high. Basically, the largest cost in the services sector is wages.

So good news this week that the Wage Price Index (the main measure of wages growth in Australia) rose by 0.79 per cent in the September quarter, the slowest quarterly pace since the March quarter of 2022, and below market forecasts of 0.9 per cent rise. Rounded to one decimal place, it was the third consecutive quarter of 0.8 per cent wage growth.

Government (public sector) wages grew 0.78 per cent, the slowest pace in 12 months. Private sector wage growth lagged public sector pay for the first time since 2020, suggesting that stronger labour supply is supporting employment growth nationally.

The biggest wage increases at an industry level were fastest in sport and recreation (up 6.7 per cent) over the year to October, followed by legal (up 6.2 per cent) and education and training (up 5.3 per cent).

Term deposit rates are falling, but there are alternatives

In anticipation of interest rate falls next year, Australian banks have slashed term deposit rates. This means most Australian savers are now receiving less than 4 per cent interest on new term deposits.

Official data from the Reserve Bank of Australia (RBA) shows that the average advertised interest rate on three-year term deposits fell to 3.35 per cent in October from 3.6 per cent in September, and down from 4 per cent at the beginning of the year. The average advertised rate across all maturities fell to 3.35 per cent in October from 3.4 per cent a month earlier.

At these levels, investors looking for income return are basically earning the inflation rate. Take out tax and investors are making a negative real return.

So make sure to also look at alternatives. Back in September I anticipated this and wrote about private credit funds as an alternative to term deposits. With returns in the vicinity of 10 per cent, private credit funds are turning the heads of savvy investors who are willing to look beyond the safety of term deposits.

Private credit refers to loans that are given by non-bank lenders, usually through private credit funds. Think of these funds as places that pool money from investors and then lend it directly to businesses or property developers, usually at higher interest rates than what the banks are offering. Unlike traditional bank loans, private credit loans don’t come from deposits but from capital raised by the fund. It’s a structure that allows for much more flexibility for borrowers, while investors have the chance to earn much higher returns.

The appeal of private credit is simple: you’re lending your money at a higher interest rate, which means a higher return. While term deposits might have a fixed rate of 3.5 per cent, private credit is returning up to 10 per cent or more. That’s a big difference - especially when compounded over several years.

Why, then, should you consider a riskier option like private credit over term deposits? It’s simple: higher returns.

Beyond the attractive returns, private credit also has a level of diversification that term deposits simply can’t match. Investing in a private credit fund means you’re spreading your risk across multiple borrowers and sectors, rather than putting all your eggs in one basket.

Of course, higher returns also mean higher risks. Private credit is far less regulated than traditional banking, and there’s less transparency around the health of the loans being issued. Some funds have been known to delay disclosing bad loans, and others charge hefty fees that can eat into investor returns. That’s why it’s so important to do your own due diligence and choose your private credit fund carefully with the help of a financial advisor.

Private credit won’t be the right fit for every investor. If safety and guaranteed returns are your top priorities, term deposits should still have their place in your portfolio. But if you’re after higher income returns and are willing to take on a bit more risk, private credit stands as an enticing alternative.

Travel money: Waiting for the next adventure or currency play?

After having just returned from holidays and wondering what to do with the balance on my travel card, I was interested in new research from ALL - Accor Hotel’s booking platform and loyalty programme. It showed Australians are sitting on a potential $1.04 billion in unspent foreign currency, with almost seven in 10 (68 per cent) international travellers admitting to having leftover holiday money tucked away at home.

Libby and I have a US dollar balance left over and I’ve been wondering whether to:

• transfer it back to one of our bank accounts,

• keep it there for a future trip to the US or,

• use it to pay for offshore online shopping in US dollars.

Given the strength of the US dollar, I’m leaning towards keeping the money in the travel card.

The Accor research also revealed that one in seven (14 per cent) returned travellers are holding on to at least $300 in foreign currency, while a third (34 per cent) have the equivalent of $49 squirrelled away.

A surprising 97 per cent of Australians are still opting to carry physical cash in the destination currency when travelling abroad, despite the plethora of cashless travel money cards available. Money-savvy Aussies are carrying cash to avoid international card transaction fees (43 per cent), as well as trips to the local market (60 per cent), food and drink purchases (68 per cent) and other small purchases (73 per cent). Aussies are also a generous bunch, with two in five (43 per cent) admitting that they carry cash to tip locals.

When it comes to how we exchange our money, traditional currency exchange methods remain the most popular, with 56 per cent of Australians visiting currency exchange stores and 38 per cent heading to their local bank. Surprisingly, even the digital native generations (Gen Z and Millennials) prefer traditional banking (35 per cent) over apps (19 per cent) for acquiring their holiday money.

It seems we’re a sentimental bunch when it comes to our travel money. Nearly half (49%) of Australians travelling abroad admit to holding on to leftover foreign currency after a trip, hoping they will use it when returning to that country.

The top five most popular currencies to hold on to were USD (37 per cent), euro (33 per cent), Singapore dollar (21 per cent), British pound (20 per cent) and NZ dollar (20 per cent).

Flat month for superannuation returns

Super funds faced a tougher market over October with superannuation research house SuperRatings, estimating that the median balanced option returned 0.2 per cent to members over the month.

Most asset classes reported negative returns with international shares and cash the only major asset classes likely to deliver positive returns. For balanced and growth style options, their international share exposure proved to be just enough to avoid a negative return for the month. However, more defensive options dipped into the red as both fixed interest and property fell.

The median growth option grew by an estimated 0.4 per cent in October, while the median capital stable option, with limited exposure to international shares fell by -0.3 per cent.

Pension returns mirrored the accumulation results, with the median balanced pension option increasing by an estimated 0.2 per cent. The median capital stable pension option is estimated to fall -0.4 per cent over the month, while the median growth pension option is estimated to rise 0.4 per cent for the same period.

Why the US sharemarket has gone crazy since the election

The Trump election win has certainly ignited the US sharemarket. Whether you like Trump or not, US investors seem to be pretty happy at the prospect. The reaction has been extraordinary, on top of a pretty phenomenal year already:

• The Dow this week set its 52nd record high for the year.

• Tesla has added $US450 billion in value in one month.

• Bitcoin has added $US1 trillion over the last 12 months.

• The S&P 500 has added $US15 trillion over the last 13 months.

• Gold has added $US4.5 trillion over the last 12 months.

• Nvidia has added $US2.4 trillion over the last 12 month.

• ‘The Magnificent 7’ have added $US9 trillion over the last four years.

This is one of the greatest runs in stock market history.

Other figures of interest are:

• Stock prices for private prison companies: CoreCivic and Geo Group surged by 29 per cent and 42 per cent respectively after Trump’s election victory.

• Trump has promised to initiate the largest deportation in U.S. history as president-elect.

• The ACLU (American Civil Liberties Union) reports that the private prison industry benefited from over a 50 per cent expansion in the federal immigration detention system during the Trump administration.

Is your super balance on track to be retirement-ready?

Planning for retirement can sometimes feel like you’re trying to hit a moving target, especially when it’s years - or decades - down the track and you’re juggling all sorts of financial commitments. The problem is that plenty of Aussies in their 40s or 50s aren’t even sure what ‘on track’ even looks like for them.

Getting a handle on your retirement readiness is so important. After all, no one wants to end up short of cash in their later years. So, how do you know if you’re on track? I recently sat down with Steven O’Donoghue from Brighter Super, and he had some cracking insights to share about how to work out if you’re retirement-ready and, if not, what you can do about it.

“Retirement is individual,” Steven says. “You only retire once, so you want to do it well.”

The first step? Pin down what type of lifestyle you want in retirement. Would you be happy with a fairly modest lifestyle, or do you want to live comfortably and not have to worry about your cash reserves? ASFA research shows that a comfortable lifestyle for a single retiree requires around $595,000 in super at age 67, while a couple needs $690,000. These figures assume you’ll draw down on your super over time and receive a part Age Pension to cover your day-to-day living costs.

Those are big numbers, so what does it look like in real terms? For a comfortable retirement, ASFA estimates annual living costs of $52,085 for singles and $73,337 for couples if you’re between 65 and 84. A modest lifestyle, on the other hand, costs about $33,134 for singles and $47,731 for couples.

Just remember that these figures only provide a ballpark for what ‘on track’ could look like –your personal goals and circumstances might be different. Use the ASFA calculator and plug in your own numbers for the retirement lifestyle you want.

Check your super balance: Where do you stand?

Is your super balance in line with your retirement goals? According to the latest data, the average super balance for Australians aged 45 to 54 is $219,300 for men and just $136,000 for women. That’s a fair way off from those ASFA targets, and it’s why most people will need to beef up their super contributions in their later working years.

If you’re around 10 to 15 years away from retirement, now’s the time to really dig into your super balance and see if it lines up with where you need to be. If you realise that it’s not enough to support your retirement goals, think about making some extra contributions. An online retirement income calculator can help you gauge if they’re on the right track or not.

How to get ahead by boosting your super

When it comes to ramping up your super, the decade before retirement is prime time to make your moves. Steven’s top recommendation is to start salary sacrificing. It’s a strategy where you put a portion of your pre-tax income into super, thereby reducing your taxable income while super-charging your superannuation balance.

Another option is consolidating your super if you’ve got multiple accounts floating around. Fees are the big one here. Every superannuation fund has its own set of fees, so by consolidating into one account you’ll limit the total amount of fees you incur.

Other super contributions worth considering:

Beyond salary sacrifice, there are several other ways to reach your target balance:

• Spousal contributions: If your partner’s super is lower, you might be eligible for a tax offset by contributing to their super account.

• Carry-forward contributions: If you haven’t maxed out your concessional contributions in previous years, you might be able to use this rule to make catch-up contributions.

• Downsizer contribution: For anyone over 55, this handy rule lets you contribute up to $300,000 per person (or $600,000 per couple) into your super from the profit from downsizing your home. It’s a great way to boost your super in a one-off hit, especially if the kids have flown the coop and you want to free up cash for retirement.

Quick tips for staying on track

To wrap things up, here are a few takeaways to make sure you’re on the right track for retirement:

• Review, review, review: Check your super balance and investment performance at least once a year. A little nudge now and then can keep things on course.

• Start salary sacrificing early: Even a small amount makes a big difference over time thanks to the magic of compound interest.

• Consolidate your super: Multiple accounts mean multiple fees. Consolidate to keep fees low and maximise your returns.

• Know your retirement number: Check in with ASFA’s latest retirement standards as a guide for what a ‘comfortable’ and ‘modest’ retirement might cost, and then match your goals accordingly.

• Get professional advice: Don’t leave retirement planning to guesswork – speak with your super fund or a financial advisor to get some support.

For some, retirement might feel like a long way off, but the years move quickly and your super balance needs time to grow. It doesn’t matter if you’re a bit behind right now – taking proactive steps today can make all the difference later.