Fed Announcement 0% till mid 2013

[Gone4Good]

I see that many forumites have 50% or more of their port in fixed assets. How does that support a 4% withdrawal rate?

It doesn't, but it sure is sweet for the banks and Wall Street.

Ha

Unless you bought the 2.25% 30-yr TIPS I just sold today for a 37% 18 month gain.

Other than that, it's going to be hard.

 

[Gone4Good]

Translation: The War on Savers rages on. Anyone who is retired and living partially on interest income may have thought they could weather a short storm of pathetic interest rates, but for this long? Will some of them be forced to move in with their kids and such?

I guess the 10-yr market is also in on the war on savers, driving rates down to 2.11%. Long-term investors obviously don't have much regard for themselves, waging war on themselves and all.

If there is a 'war' it is being waged by those of us who have an excess demand for safe assets. The Fed doesn't control long rates. And if the Fed's zero rate policy were wrong, we'd be seeing inflation raging and the bond vigilantees driving rates ever higher.

Unfortunately our problems aren't so easy to fix as a too low Fed funds rate. Zero rates aren't the problem, they're a symptom of bigger, harder to remedy, problems.

 

[JohnDoe]

Heh, my CU is paying a whopping 1.5% for a 5-yr. CD.

Quick, back up the truck!

That's what my CU is paying on my MM.

 

[IBWino]

That's what my CU is paying on my MM.

Really!? Which CU is that? Our CU is currently paying 0.5% on MM funds.

 

[akck]

One option is to extend your maturity out in order to get a higher yield. For instance, there is a 15 year callable FNMA step coupon bond that has a 4.12% yield to maturity. It starts as a 3% coupon that eventually rises to 6%. The step coupon offers some protection to rising rates and chances are it will get called prior to the first step increase, providing at minimum a 3% return. While 3% is nothing to shout about, it is close to what most here would like to use as a SWR.

Likewise, using long maturity callables is a good way to get higher short-term yields, assuming they get called. I've been able to get 2-3% over the past year on bonds that I assumed would get called. Of course, there is always the chance that they might not be called, so you have to be satisfied with the yield if it goes to maturity.

 

[ERD50]

This subject is near and dear to my heart. I am adverse to any form of stock market investing at this time.

Up until recently I could not give a rats. But I have recently had some very BIG CDs mature that were paying between 6 - 10% for the last 10 years, been living quite well of them. Even at 6% withdrawall I was fine.

I am also extremely adverse to using my capital although at the moment I do not have a choice. I am doing some work (which I do not like) to compensate but I prefer that to losing any capital.

What is one to do in this anti saver climate. Australia is paying up to 6% and Canada is not much better than here.

SWR

Everything has its risk. Even CDs.

-ERD50

 

[haha]

Low yield has no effect on retired people. They no longer need to purchase additional bond. If yield drops then bond price appreciates and retiree can use capital gain to offset the yield drop.

So what do these lucky retired people do when they have sold off much of their bonds for cash flow? Everyone is entitled to their opinion, but I hope people reading this idea will think it over carefully befroe adopting it.

Ha

 

[traineeinvestor]

I don't think that the Fed (i) had much choice or (ii) has actually changed its stance that significantly - the economic data is pointing to, at best, a slow recovery and the previous stance was (IIRC) for 0-0.25% for "and extended period". From both a policy and a practical perspective, keeping interest rates very low is better than rasing them - encouraging spending and investment and reducing stress on borrowers are more important right now than looking after conservative savers.

 

[Free To Canoe]

I am not worried about inflation. I am worried about deflation. Keynes showed that depressions happen when people stop spending money and low demand makes prices drop. They continue to not spend because things will be cheaper tomorrow or they are afraid (Japan) or they don't have any money (coming soon to a Homeland near you!). Then low demand kills jobs because no one is buying anything.

In the middle of all this, the government cuts spending because of pressure. Exactly the wrong thing to do. Then there is the ongoing attack on business, mostly small business. The only good thing to come out of this may be reducing the number of government employees. I suggest starting with the elected ones.

It looks like a perfect storm of stupidity, incompetence and greed to me, in all elected officials north of dog catcher.

Has anyone figured out that Greenspan caused more damage to the US than Bin Laden?

+1

 

[East Texas]

Low yield has no effect on retired people.

It certainly has an impact because the treasuries influence the rates for annuities. If a retiree wanted to convert some money to an annuity, they would be up the proverbial creek right now with the low rates.

The whole "let's keep rates exceptionally low until mid-2013" hurts anyone who is not already in a stable financial vehicle with a guaranteed return.

 

[ziggy29]

I guess the 10-yr market is also in on the war on savers, driving rates down to 2.11%. Long-term investors obviously don't have much regard for themselves, waging war on themselves and all.

If there is a 'war' it is being waged by those of us who have an excess demand for safe assets. The Fed doesn't control long rates. And if the Fed's zero rate policy were wrong, we'd be seeing inflation raging and the bond vigilantees driving rates ever higher.

It has a ripple effect. The more you drive down short term rates, the longer people have to go to chase yield -- which drives down demand for long term rates as well.

 

[Chuckanut]

Let's face it, plenty of people who depend on interest income have seen their income cut back. Who is getting this money that the savers are not getting? One thing for sure, with interest rates this low, my spending has gone down and will stay down. What I earn by working (not yet fully retired) cannot pay for all the goodies I enjoy.

 

[calmloki]

We don't depend on interest income, but it does provide maybe 1/4 of our annual net income. Most recently loaned $129,600 on a place in Camas Washington to a flipper. The flipper paid $162k for the property and we did an 80% loan to value. Also charged him (first time doing this) 2% up front as an origination fee, 12% interest, and have a 9 month balloon. It is our earnest hope that he flips the place in a few months. If so we will have made 4-5% on the money in a 2-3 month time period. Or maybe we'll end up with a place in Camas for cheap.

There is risk - we may end up foreclosing on a shaggy 15 acre trailer park in the wilds of Gates Oregon as the borrower is just now two months in arrears, but it is nice having a consolation prize if the loan goes bad.

 

[cloud]

Just my 2 cents, to clarify : "Low yield has no effect on retired people."
I assume retired people have certain amount invested in bond funds and they live on some of the distribution from these bonds and stock. The bond's distribution is fixed. What is really changing is the bond price.
However for people buying new position in bonds and having individual maturing bond, yes the current rate environment is pretty bad. I beleive the long term bond is 50% more expensive in historical standard.