In September 2020, the Federal Reserve ended its two-day policy meeting by announcing its intention of keeping interest rates at their current all-time lows until 2023.
Since 70% of the American economy relies on consumption, the Fed’s commitment to low-interest rates is part of an effort to push Americans away from saving and into spending.
If you are young, cash-rich, and looking to invest in real estate, low-interest rates could be a boon. However, if you are a retiree or someone about to retire, these historically low rates could spell trouble for your financial future.
Low-interest rates harm retirees in a variety of ways.
The Federal Reserve’s benchmark funds rate is in a range of 1%-1.25%, a near-record low. These low rates penalize responsible savers and erode the nest eggs seniors have worked diligently to accumulate. As a person enters into retirement, they face cost increases for prescription medication, expensive long-term care, and other medical costs.
Analysts for Wells Fargo bank estimate that, due to the Federal Reserve’s policies during this financial crisis, Americans have lost over $600 BILLION in interest payments on money market accounts, CDs, and savings accounts. Unfortunately, asset managers expect that amount to increase in the next few years.
Additionally, while we have been in a low tax environment for the last 15 years, I expect this low-tax environment to change as cities and states face mounting debt resulting from COVID-19 and other natural disasters.
Larger metropolitan areas and counties already have plans for tax-hikes, with others likely to follow suit.
What can pre-retirees and retirees do to survive this situation?
This punishing low-rate environment might have you seriously considering chasing aftermarket returns by investing in riskier instruments such as equities and real estate. This thirst for gains is incredibly powerful due to ten years of a bull market, which also made a seemingly “miraculous” recovery after an intense sell-off in 2018. So, some folks reason, why not play it a little riskier and snap up those returns? After all, you might be able to time the market, jump into the warm water and then hop out again, just before the whole thing starts to boil. Or, you could wind up losing a massive chunk of your portfolio, money that you will never have enough time to recover, especially in an anemic economy. If you’re thinking of exposing your wealth to more volatility and risk, there’s one crucial question you must ask yourself:
Can I honestly afford to lose ANY of my savings at this point in my financial life?
Take a look at “safe money” products.
To avoid making mistakes with your money when time isn’t on your side, you need to know your risk capacity. You should sit down with a team of qualified financial professionals and determine how much of a return you will need to provide the kind of post-work life you want. I do feel, though, that wherever you are on this timeline, your portfolio can benefit from creating a “safe money” cornerstone. Using vehicles such as contractually-guaranteed annuities and life insurance, you can make your cash work harder and more predictably. In the future economy, there will be no place for “lazy money”. Every dollar needs to do the work of three or four dollars if you want your retirement to be comfortable.
Consider converting your IRA to a Roth IRA.
Tax rates right now are probably as low they’ll ever go. Tax expert, IRA guru, and financial commentator Ed Slott says that retirement plans are in lawmakers’ crosshairs as they look to raise taxes post-pandemic. “An IRA is a big bag of tax,” says Slott. Slott points out that because non-Roth IRAs and 401(k) accounts haven’t been taxed yet, they are sitting ducks for future higher taxes. He recommends consulting your financial advisor to determine the best way to protect your tax-deferred accounts.
If you are still working, you may want to consult a professional to see if it’s time to convert your non-Roth IRA to a Roth. Although you will have to pay taxes on a Roth conversion now, it’s almost a sure bet that taxes in the future will be going up. You could end up saving thousands in taxes!
Look at annuities to guarantee your future expenses are met.
If you are approaching retirement, you should ensure that you predict your future monthly expenses as accurately as you can and have a stream of income available to meet those needs. Annuities serve a useful purpose in any portfolio by creating and contractually guaranteeing this necessary stream of income in a tax-advantaged way. Once you’ve got your predictable income stream, you could then consider investing in other assets if your situation and risk tolerance allows.