Historic Low Rates Present Retirees with Quite a Challenge

30 Jan

What now?

When I first got my start in this business in the mid-1990’s, interest rates on short term CDs hovered around their 50 year averages. Somewhere around 5% for 12 months.  As the economy over-heated, one tactic used by Alan Greenspan (remember him?) was to raise interest rates to cool things off.

That led to rates of 6%, then 7% and even 7.5% for 12 months with one of those (at the time) new-fangled internet banks.  For a five year CD, I could lock in rates of 9%.  Funnily enough, as the dot com bubble was inflating, none of my clients felt like 9% was very appealing.

Anyway, things peaked out in 2001 or so and then began a series of rate reductions over time to once again pump up the economy.  Back in those high-interest days, some of my clients would actually remind me of the days, back in the early 80’s when they could lock in rates of 15% or more on 12 month CDs!

So, as an advisor to retirees, it made my life easy when rates were in the 5-6% range.  Today, it is difficult to find a 12 month CD with a reputable bank that pays more than 1%.  The impact this is having on retirees is difficult to quantify.

What it has led to is a new series of “Retirement Specialist” who claim to be able to offer you ways to protect your portfolio against market losses.  They are on the radio, on TV and the internet, too.  I’ve seen and heard some very well-crafted marketing of late designed simply to scare a senior. They tell you Warren Buffet has sold his stocks and so should you.  Or they claim to have predicted the 2008 crisis and are now predicting an even greater calamity.

Never short on fear-mongering, these folks do sometimes (almost always?) lack factual basis. Not surprisingly, these charlatans end up recommending an equity indexed annuity after they’ve assessed your needs. Translation – they are assessing whether your savings placed in their garbage investment will help with their need for next month’s BMW payment.

As rates remain low, people have begun to add more and more risk to their savings portfolios.  Is this the right answer?  Bond investments have seen huge inflows of money.  But aren’t those a bit at risk when rates ever do rise?  Stock investments that focus on dividend paying stocks have seen lots of money coming in, too.  And one must always be careful about annuities and whether they are appropriate for an individual’s needs.

To be quite honest, it has never been more difficult for us to craft a quality portfolio that keeps capital preservation, income and growth along with proper liquidity in mind.  Bet you thought my job was easy, didn’t you?

If you clicked this hoping I had a more specific answer, I’m sorry. There is no silver bullet. Diversity, low-costs, flexibility, control, liquidity, finding guarantees all have their own challenges these days.  But they remain the key to safe investing in retirement.

One day, rates should once again go up.  And when they do, we’ll adjust portfolios.  In the mean time, the only solution we have is to stay short, cautious, liquid and diverse.  Sometimes, we take small portions of the portfolio and tie it up with longer-terms if the safety and yield opportunities fit your needs.

Please feel free to email or call for more specifics. Due to many regulations designed to keep government regulators employed, make my job harder and help keep bad advisors in business, we can’t list too many specifics here.

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