Will higher interest rates save retirement for seniors?
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The recent bond market rout may be bad news for bond investors and anyone planning to refinance a mortgage anytime soon. And it’s certainly not what Federal Reserve Chairman Ben Bernanke had in mind when the Fed launched its massive $600 billion bond-buying spree.
But if the trend toward higher interest rates continues, it will be very good news for retirees starved for low-risk return on their portfolios.
Ultra-low interest rates have helped banks, corporations and government to stabilize in the wake of the 2008 financial crisis, but they’ve been nothing but bad news for retirees. People living on fixed incomes have been forced to cut expenses, eat into principle or rely on higher-risk fixed income investments or stocks.
The problem isn’t limited to interest rates. The erosion of traditional defined benefit pensions means that just 20 percent of private sector workers can count on monthly pension income. And Social Security is replacing a smaller percentage of income due to the increasing full retirement age implemented in 1983, rising Medicare Part B premium deductions and more Social Security income is subject to income tax.
Inflation also poses a big threat to retirees. Social Security hasn’t paid a cost-of-living adjustment for the past two years and its formula doesn’t recognize the higher rates of medical inflation experienced by seniors. Near-zero interest rates on money market funds and certificates of deposit exacerbate inflation’s impact.
But rising rates could yield a big change in the outlook for retirement security. Barry Glassman, president of Glassman Wealth Services, thinks that’s just where we’re headed. “We’re coming to an end, in the near term, of the Fed artificially keeping rates low. And high deficits mean the supply of debt from the government won’t stop – but demand from the Fed to buy it will. “That means we’ll see interest rates heading higher – not into the stratosphere, but a plateau higher than we’re at today. It could take 18 to 24 months, or it could happen in six months.”
Glassman argues that “retirement could be saved for a lot of people” if long-term certificates of deposit get to five percent sometime in the two years. “If retirees can earn 5 percent with very low risk, that will be very competitive with a higher-risk option like stocks. At that interest rate, there will be a huge wave of demand from retirees who will want to lock in at that rate for 10 years. They’ll take money out of money markets and the stock market to do it.”
If Glassman is right, this could represent a huge shift in the investment landscape as the baby boomer age wave accelerates and demand for low-risk investments accelerate. As Glassman puts it: “Five percent is the new eight percent.”
What will higher rates mean for housing? Not much, Glassman argues. He thinks most people who can refinance their mortgages already have done so. And the government can’t keep rates at ultra-low levels indefinitely in hopes that housing will recover. “Housing’s recovery will be much more sensitive to employment than interest rates,” he says. “Getting the jobless rate down will do more for housing than anything else.”
Photo: Barry Glassman/Glassman Wealth Management is pictured in an undated handout photo. REUTERS/Handout
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The Fed must continue to drive the dollar down or we will have no employment in the USA. In the USA means human beings physically located in the USA. Deceptive labeling practices on economic statistics count an increase in growth when a corporation headquartered in the USA closes an American facility and replaces it with one in India.
The Government must distinguish between these!
It took the financial industry many years and a lot of lobbying to wean the masses off of fixed return savings vehicles that were north of four percent and getting them adjusted to a risky three or four percent that they have to work for. I really doubt that they are just going to provide a fixed five percent anything to the general masses.
Googleing “Savings and CD rates” shows one percent. Happy Time!
I really hope I’m wrong and the magic markets will prevail.
This article represents wishful thinking on behalf of retirees. Where is the critical analysis? Since the Fed is keeping rates down explicitly in order to ‘stimulate’ (sic) the economy, where is the discussion about if/when that action is no longer needed? If the banks have black holes for balance sheets (mark-to-model RE debt that will be priced much lower than currently accounted for when foreclosed, liquidated, and marked-to-market), they will clearly need *more* money just to maintain capitalization. That money can and will *never* be ‘withdrawn,’ it is a permanent addition to taxpayer debt. What about the US gov’t needing to bail out cities and states to the tune of $1T this year, and as much or more in out years? What about the demographics of exploding unfunded pension liabilities for all public union workers that need to be flushed through bankruptcy to save government budgets at all levels? How long will it be before that occurs, how much more debt will be incurred?
No, the Fed is nowhere near done with QE. Since they are the primary buyer through offshore and front buyers, or through banks (who they swap new dollars to in exchange for more bad MBS debt, so the banks then buy the newly issued bond debt, giving the taxpayer the luxury of paying interest to the very sots who put us into this mess), it is clear the Fed is on a mission to ‘save’ the banks by the tax of inflation and interest payments by the taxpayer. But if the Fed lets rates rise even a percent it could break the finances of the government.
No, we are on a path of QE for many years to come. We have turned Japanese. There is no ‘happy path’ the Fed can manipulate to get us out of the need to liquidate all the bad debts and malinvestments. They are simply dragging it out slowly in hopes of not crashing the system. But the bill is due, and someone is going to pay it: the taxpayer. And you can take THAT to the bank.