We live in interesting times. Who would have predicted Australian cash rates and bond yields would be trading at 1% or less at the end of last year?

Well, here we are in August, with record low cash rates of 1% and with Commonwealth bonds trading at yields to maturity of less than 1% for maturities up to 10 years. This, in itself, signals cash rates are likely to fall further.

It does already appear the market is largely building in the expectation of cash rates in Australia being cut 2 more times. Some commentators such as Deutsche believe rates might fall a further 3 times to 0.25%.

So how low can rates go?

Well, if Germany and Japan can be used as a guide, rates below zero should not be ruled out. Overnight cash rates are currently negative in both Germany and Japan. What’s more, the whole German yield curve is currently negative. In fact, Germany recently issued more than 800m Euro in 30-year bonds at a yield to maturity of -0.11%.

Figure 1. Australian, German and US yield curves as at 27 August 2019

Source: Bloomberg

This is, no doubt, concerning reading for retirees or anyone relying on cash deposits for income - already making ends meet in retirement has, arguably, never been more difficult.

It’s no surprise more and more retirees are looking to the share market for income, the Australian All Ordinaries has averaged around 6% gross yield for the last 30 years, when one includes franking credits.

But it must be said, many of Australia’s traditional large income stocks have been doing it tough.

The big-four banks are facing significant headwinds, while Telstra’s recent full year results confirmed the telco’s dividend is now 48% lower than it was two years ago. For a retiree without a diversified portfolio this could be devasting.

To get the most out of the share market retirees should build a diversified portfolio of income stocks and manage it using a tax effective strategy.

Franking credits, thankfully, are here to stay following the Labor Party’s defeat at the Federal Election. This is one area retirees can benefit.

Consider the Qantas off-market buy-back announced last week. I recently commented that for tax-exempt investors, it’s like money for nothing.

That’s because when taking franking credits into account, the buy-back would represent a premium of around 14% on the share price at the time the buy-back was announced.

Our listed investment company, Plato Income Maximiser (ASX:PL8), expects to tender the entirety of its Qantas holdings.

PL8 is the first and only Australian Listed Investment Company (LIC) paying monthly dividends to support the income needs of retirees and this is just one example of how we manage our investment strategy from a retiree’s taxation perspective.

An Entitlement Offer for PL8 is currently open. Existing PL8 shareholders (who were on the register on the record date of August 13) are entitled to one new share for every 1.6 existing shares held. Existing shareholders may also apply for oversubscriptions. Any shares not taken up by existing shareholders can be subscribed for by new shareholders via the Broker shortfall offer. The offer closes on August 30 and the offer price for new and existing shareholders is $1.10.

While the prospect of cash rates on par with Germany and Japan might be daunting, retirees who rely on just one or two big-name traditional Australian income stocks take on considerable risk.

At Plato we aim to build solutions for retirees in order to reduce that risk and increase income.

Learn more about PL8 and the entitlement offer?

Plato Investment Management is an Australian owned boutique equities fund manager specialising in maximising retirement income for pension phase investors and SMSFs. To find out more click here.