3 Ways Low Interest Rates Could Derail Your Retirement

Sep 29, 2016
Author: Scott Hanson

From home purchases to borrowing to investing, financial experts talk a great deal about how our current low interest rate environment is beneficial for the economy.

But how are these low rates impacting pre-retirees and retirees?

First, a little background.

When interest rates are low, consumer spending rises.

The lower the interest rate, the more likely people are to borrow money to buy cars, recreational vehicles and homes.

The same holds true for businesses and farmers, both of which are more likely to make large investments in infrastructure when the cost of borrowing is cheap.

From a “big picture” standpoint, low interest rates should result in more overall consumer spending, which creates jobs, which should further strengthen the economy.

However, low interest rates aren’t good for everyone.

"I understand that savers are hurt by this policy."
Fed Chair Janet Yellen on the central bank’s continued low-interest rate policy.

Retirees prefer higher interest rates, because:

  • They can create better returns on investments.
  • They can help underfunded pensions.
  • They tend to lower the cost of long-term care premiums.
  • They act as a hedge against future inflation.
  • They are better for “safe havens” such as CDs and savings accounts.

Unfortunately for retirees, interest rates remain low. This may force retirees to make some difficult choices to meet expenses.

3 low-interest rate decisions retirees may be forced to make:

  1. Adapt to a lower income.
    I don’t like saying it, and you probably don’t like reading it. But the fact of the matter is, that low interest rates probably mean your investments are generating less money. So unless you want to spend down your principal, and risk running out of savings, if you’re retired you’ve probably had to tighten your budget.

  2. Spend down some of their savings.
    Again, I don’t like saying this any more than you like reading it. But the fact is, if your income from your investments remains low, you may be forced to spend more of your savings than is fiscally prudent. This is a Catch-22, because the more of your savings principal you spend, the less of your money you have invested, which will likely make your returns lower over time, even if interest rates eventually rise.

  3. Take more risks.
    Because “there is no such thing as a free lunch,” any attempt to generate higher returns will result in additional risks. Always remember: every investment includes risk. For those chasing higher returns, it’s imperative that a retiree has a good understanding of the potential downside in any investment they choose.

Conclusion

The Federal Reserve nominally raised interest rates in December 2015 for the first time since 2006. In its six meetings since, the Fed has not raised interest rates further. Some economists argue that by keeping rates at nearly zero we are creating a false economy, which could have an impact on the upcoming presidential election.

Want to know more about how November’s election might impact your retirement? Download our free eGuide, “Electing the Best President for Your Money” to find out which political party is best for your financial future.

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