Low interest rates throw wrench into retirements

[bondi688]

Low interest rates throw wrench into retirements | StarTribune.com

Are you feeling the impact of the low interest rate policy?

"The Federal Reserve's near zero interest-rate policy, aimed at stimulating the economy, has created bargains for borrowers refinancing a mortgage or buying a car. But the low rates are penalizing "savers" such as seniors and others on fixed incomes, forcing millions of middle-class Americans to reconsider how they will live when they retire, if they can retire at all.

Combined with a volatile stock market, the rock bottom rates make you feel like "there's nowhere to go" with your savings, said Nancy Nonini.

More retirees with less income means the economy could feel the drag from less consumer spending. The critical question is how long will interest rates stay low, Jack VanDerhei, director of research at EBRI's Center for Research on Retirement Income. The Fed has committed to keeping rates near zero through 2014. If rates stay low beyond that, retirees spending less could be "the tip of the iceberg," he said."

And to think, interest rate for saving accounts in the 1990's were in the 4 to 5% range, yet the economy was booming, and there was no significant inflation. Today's monetary policy penalizes savers with low returns for their savings. At the same time the worth of the assets decreases because of a declining dollar.

 

[NW-Bound]

Perhaps we are all paying now for our past collective sins. Could it be that the economic boom of past years was just a mirage? If our economy was really booming, we would not have the trade deficit like we have had, and we would not owe the Chinese a large debt via our Treasury bonds, right? Or is it because, although we did grow our economy, our consumption increase outran it?

It would not surprise me to see our living standard to be lowered in the years ahead. If the effect is not manifested via low investment returns, it has to be via high inflation. When a nation produces less, it has to consume less. The only way to get better is to produce more.

 

[ERD50]

Low interest rates throw wrench into retirements | StarTribune.com

Are you feeling the impact of the low interest rate policy?

Yes, my adjustable rate mortgage keeps dropping to ridiculously low levels. Bring 'em on.

But the low rates are penalizing "savers" such as seniors and others on fixed incomes, forcing millions of middle-class Americans to reconsider how they will live when they retire, if they can retire at all.

What do low interest rates have to do with 'seniors and others on fixed incomes'? And what do they mean by 'fixed income'? I think that is often applied to SS, but that is inflation adjusted, as are many public pensions (but few private pensions).

If they are talking about people who rely on CDs for their income, were they better off with 10% CDs and high inflation? Maybe they need to learn to accept a little volatility? It won't kill you, in small doses (even a 40% AA to stocks gives a huge boost, historically).

Combined with a volatile stock market, the rock bottom rates make you feel like "there's nowhere to go" with your savings, said Nancy Nonini.

Take a look at the Vanguard and Fidelity Hi-Yield Bond Funds. They pay ~ 6.5% and have about half the volatility of stock index funds.

-ERD50

 

[Khufu]

Yes, savers are suffering these days, but it's not because of financial repression like China, for instance. Nor is it the result of some crazy idea of the Fed. It's the result of the balance sheet recession that resulted after the bursting of the housing bubble. It's also the case that we benefited from the spending excesses of the live-above-your-means crowd for many years. At any rate, the best outcome for us savers at this point is for growth and employment rates to recover as quickly as possible. Low interest rates help that process to some extent and will benefit us in the long run.

 

[pb4uski]

Whee.... The 17% annualized YTD return on my equities has me forgetting about the 9% annualized YTD return on my fixed income.

 

[Alan]

Mortgage rates are very low at present. How about other borrowing rates, car loans, credit cards etc. ?

I really have no idea what the historic rate difference is between what banks lend money at and what they borrow at, and how that relates to what rates they pay savers. The Fed is keeping interest rates at near zero rates which means banks are borrowing at very low rates, but how much of the difference are they pocketing compared to the past.

I have no idea, I just expect the banks are ripping off their customers as usual.

 

[photoguy]

"The Federal Reserve's near zero interest-rate policy, aimed at stimulating the economy, has created bargains for borrowers refinancing a mortgage or buying a car. But the low rates are penalizing "savers" such as seniors and others on fixed incomes, forcing millions of middle-class Americans to reconsider how they will live when they retire, if they can retire at all.

Do you think we'd be better off if the fed just decided to raise rates high enough so that people with CDs can make more than inflation? If you took away the "stimulus" from the low interest rates would the economy have even recovered from the 2009 lows?

To me this sounds like a case of being careful what you wish for.

 

[mathjak107]

low rates were wonderful if you werent betting the ranch by hanging out in cash instruments.

the capital gains you got from bonds as rates fell were amazing.

equities have had positive returns too.

 

[audreyh1]

Do you think we'd be better off if the fed just decided to raise rates high enough so that people with CDs can make more than inflation? If you took away the "stimulus" from the low interest rates would the economy have even recovered from the 2009 lows?

To me this sounds like a case of being careful what you wish for.

+1

It so bugs me when articles talk about seniors on "fixed income". Sorry, but seniors relying on SS are NOT on fixed income and many are making out much better than working folks who haven't seen equivalent salary increases for years or the (still supposed to be working) folks who are having a really hard time finding an reasonable paying job today.

Yes, we are in a period of "financial repression" where you can't earn a real return on cash investments or some classes of "safe" bonds. But we are paying the piper for past excesses that all enjoyed.

You need a booming economy for the Fed to raise short term interests enough to try to put anti-inflationary "brakes" on the economy. Savers get to "enjoy" the juicy interest income for a while. But for this situation, you have to have a BOOMING ECONOMY. Sorry, we don't have this situation anymore, and you better get used to it.

 

[grasshopper]

First full year in retirement, Federal Income Tax paid in 2007 $2000, Federal Income Tax paid 2011 $0. Portion of portfolio devoted to living expenses, up 2% after expenses in the same time frame. I can't tell who the loser is.

 

[W2R]

It would be nice for us retirees to be able to get high rates of return on new CD's and money market, but it is what it is.

I can't imagine retiring without at least a little cushion in one's retirement plan.

 

[Gatordoc50]

I believe rates will not rise until we balance the budget and pay down our debt. In other words, never.

 

[kaneohe]

low rates were wonderful if you werent betting the ranch by hanging out in cash instruments.

the capital gains you got from bonds as rates fell were amazing.

............................

.......but the more difficult question always seems to be not "What should I have done yesterday or last yr?" but "What should I do today?" when bonds are at/near their (local?) peaks. Do I jump in and then just grin and bear it or do I go buy a crystal ball and play market timer? I'm assuming that is what OP would be asking esp when you see "whee" flying around.....

 

[ziggy29]

It so bugs me when articles talk about seniors on "fixed income". Sorry, but seniors relying on SS are NOT on fixed income and many are making out much better than working folks who haven't seen equivalent salary increases for years or the (still supposed to be working) folks who are having a really hard time finding an reasonable paying job today.

I think there's some truth to this. When SS recipients received no COLA a couple years ago, there was a lot of coverage of that and talk about how it denies that the real cost of living for many seniors was going up despite what the CPI said. But many of us who work haven't seen a raise for several years, and many of us are working harder and longer hours for the same frozen pay. And our cost of living has risen, too. But there's almost no media coverage about us.

But we are paying the piper for past excesses that all enjoyed.

Agreed. I just don't like that the people who are most impacted by it aren't the ones who insisted on living it up with borrowed money to begin with. Their parents and grandparents enjoyed the party, but they endure the hangover.

 

[mathjak107]

.......but the more difficult question always seems to be not "What should I have done yesterday or last yr?" but "What should I do today?" when bonds are at/near their (local?) peaks. Do I jump in and then just grin and bear it or do I go buy a crystal ball and play market timer? I'm assuming that is what OP would be asking esp when you see "whee" flying around.....

well as a follower of the permanent portfolio concept im never without flying fighter cover on my portfolio.

thats why its important to not only own assets that corrolate opposite but to own enough of them to run with the ball when its day in the sun comes.

 

[bondi688]

The economy was functioning well in the 1990s with an interest rate of 4 to 5%, and inflation was not an issue. Was the abnormally and artificially low interest rate since 2001 not at least partly responsible for the housing bubble and the reckless speculations that led to the collapse? Was there not more irresponsible borrowing and spending when the interest rate was held to almost zero? The almost zero rate is now supposed to be the norm, what would happen to the market when the Feds need to raise it at some point?

 

[Lsbcal]

....(snip)...
Combined with a volatile stock market, the rock bottom rates make you feel like "there's nowhere to go" with your savings, said Nancy Nonini.
...

It's a risk story.

Prediction: more people will choose to bias their allocations towards stocks. This will pick up as people get a bit more comfortable with equity risk. If rates head up slowly that will accelerate the move towards stocks as bond total returns become painfully low.

Of course, at some point stocks will take a dive into another business downturn. But in the mean time one gets a decent investment return.


P.S. I don't trust predictions.

 

[Coolius]

How do you folks do it?

First full year in retirement, Federal Income Tax paid in 2007 $2000, Federal Income Tax paid 2011 $0. Portion of portfolio devoted to living expenses, up 2% after expenses in the same time frame. I can't tell who the loser is.

I have encountered posts like Grasshopper's here & there on this site. But for the life of me, I can't see how one can be paying zero federal taxes unless one's income was really low.

I know Personal Deductions for a couple would be about $8K, plus some additions for being above 65. The standard deduction for a couple filing jointly would be about $12,000.

So, to pay zero Federal tax, taxable income would have to be around $20,000 or so, correct? I would find it difficult to live on that in California.
Maybe I should think about moving?


( maybe some folks have tax free income from Muni Bonds, or supplement this number with ROTH withdrawals ? )

How do those of you who pay no tax do it? Your LBYM must be very commendable. I wish I could be in that situation.

 

[Live And Learn]

I have encountered posts like Grasshopper's here & there on this site. But for the life of me, I can't see how one can be paying zero federal taxes unless one's income was really low.

There are several ways. For a married couple the standard deduction is 12k and exemptions are 7k, total 19k. The first 19k of your annual needs comes from a combination of IRA/401k withdrawals, taxable dividends, or capital gains. If you are selling assets that you made a 100% return on then you are actually getting 38k in cash to spend. The rest of your income comes from taxable accounts (cash), return on income tax free muni bonds, or sale of equities with zero profit (ie: sell a winner and a loser to offset gains, repurchase the loser after 30 days). Not so hard to do with some planning.

ETA: for each person who is 65 or older you get an additional 3400 in exemptions. If a married couple are both over 65 then max income before taxes is 26k.

 

[kaneohe]

ETA: for each person who is 65 or older you get an additional 3400 in exemptions. If a married couple are both over 65 then max income before taxes is 26k.

not exactly......exemptions are the same but the std deduction increases a little......

Additional amount for aged or blind
married 1150 for each aged person
single 1450

 

[kaneohe]

I have encountered posts like Grasshopper's here & there on this site. But for the life of me, I can't see how one can be paying zero federal taxes unless one's income was really low.

I know Personal Deductions for a couple would be about $8K, plus some additions for being above 65. The standard deduction for a couple filing jointly would be about $12,000.

So, to pay zero Federal tax, taxable income would have to be around $20,000 or so, correct? I would find it difficult to live on that in California.
Maybe I should think about moving?

( maybe some folks have tax free income from Muni Bonds, or supplement this number with ROTH withdrawals ? )

How do those of you who pay no tax do it? Your LBYM must be very commendable. I wish I could be in that situation.

basically what you said: income (taxable or tax exempt), Roth withdrawals, or use of principal (income might be attached in the case of capital assets)
as stated by L&L

 

[grasshopper]

I have encountered posts like Grasshopper's here & there on this site. But for the life of me, I can't see how one can be paying zero federal taxes unless one's income was really low.

I know Personal Deductions for a couple would be about $8K, plus some additions for being above 65. The standard deduction for a couple filing jointly would be about $12,000.

So, to pay zero Federal tax, taxable income would have to be around $20,000 or so, correct? I would find it difficult to live on that in California.
Maybe I should think about moving?


( maybe some folks have tax free income from Muni Bonds, or supplement this number with ROTH withdrawals ? )

How do those of you who pay no tax do it? Your LBYM must be very commendable. I wish I could be in that situation.

About 85% Qualified Dividends, I took $30K in LTCG in 2011, I am taking $40+ this year in our 15% bracket zero tax. No loss harvesting because I haven't had a loss since 2000. I will pay about 2.6% AZ state tax. Starting to convert tIRA's to Roth's this year, so I may pay $500 in Fed tax. I won't take SS until age 70, RMD'S will kill us without converting a bunch of tIRA's.

 

[audreyh1]

If your income is coming mostly from qualified dividends and capital gains, you pay 0% tax on that income until your total adjusted income reaches something like $65K per couple, quite a break!

 

[samclem]

If your income is coming mostly from qualified dividends and capital gains, you pay 0% tax on that income until your total adjusted income reaches something like $65K per couple, quite a break!

Yes. But just so it gets said, if the current law holds all that changes in 4 months. After that the LTCG rate goes to 20% (10% for those in the 15% bracket) and all dividends (qualified or not) will be taxed at the ordinary income rate.

For high-income earners ($250K for joint filers) , there'll be an additional 3.8% tax on investment income. I don't think that one will affect me directly . . .

Lots of folks think the present tax rates will be extended in some form, but as of now, LTCG and dividends are in for a big tax hit in 2013.

 

[Live And Learn]

not exactly......exemptions are the same but the std deduction increases a little......

Additional amount for aged or blind
married 1150 for each aged person
single 1450

mea culpa ! thanks for the correction. And lets be thankful I'm not a tax accountant