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Combatting Low Interest Rates in Retirement

Let’s face it, if you’re retired it would be nice to speculate in the market and take advantage of those days where you see the market up high and be smart enough to not be there when the market dips low. When you are retired, you are depending on your money to provide you with the lifestyle you have been living, but for the rest of your time here. 

And in retirement, speculation is just too risky, unless you want to go back to work or go live with the kids.

When I started advising people on their retirement planning over 24 years ago, prime interest rates peaked at 11.5% in 1989, the 10-year treasury was just under 10% and inflation that year was 4.8%. For retirement planning, that made things very easy since the available interest rates were more than twice the inflation rates. 

During your working years, you collected, you invested and you accumulated a great deal of retirement-income assets. The rule of thumb was, “take out no more than 4% per year, and you’ll never run out of money.” The question on people’s minds wasn’t, “can we retire successfully?” But it was, “how do we leave the most money to our kids without the government’s hand in the piggy bank?”  

Yes, there was a time you were anticipating having money left over after you died.

Here we are in March of 2013, with a very different scenario: The guessing game of when to be in and when to be out of the market has driven most retirees to the side lines. Not a bad place to be if there was not inflation. However, inflation, as presented by the feds, has averaged 2.42% over the last 10 years. And after some really fuzzy math, that seems harder to fathom with every trip to the gas pump. 

So, here’s the million-dollar question: How do I stay ahead of inflation, preserve my accumulated retirement assets, and maintain an income consistent with my style of living for the rest of my life?

Let’s look at the landscape of current interest rates. At this point in time, money markets nationally average 0.7% APY, a three year CD’s national average is 1.09%, and a five year treasury note is 0.836%. Did you happen to catch that those numbers are less than current inflation rates?

Why Does the Fed Change Interest Rates?

The Federal Government is responsible for maintaining a healthy economy. If the economy is very slow, the Fed might decide to lower interest rates, which will make money more available to businesses, home buyers and consumers, thereby stimulating the economy. If the economy is robust and growing too quickly (in the Fed’s opinion), they will raise interest rates to slow things down. Do I need to say any more? My opinion is interest rates will not go up in the next three to five years. Even then, interest rates will creep up at a snail-like pace. And that pace would be lucky to keep up with, let alone surpass, inflation.

How do you combat this low interest rate environment?

First, know what you want your money to do for you. This may sound trite and obvious, as most people’s answer is “I want it to grow,” but that’s the answer to a different question. When really looking at what you want your money to do for you, the answers could range from “we want it to buy a new boat in five years,” “we want it to travel around the world,” “we want it to build a new cabin in the mountains,” or the more common these days, “we want it to have our money replace our work income for the rest of our lives, without fail.”

Simply said, you may have three requirements of your money: immediate, short-term and lifetime. Looking at these in reverse order, here’s the scoop: if you need $2,000 a month in income, in addition to your Social Security or other sources (let’s just forget about pensions), the insurance industry has gotten ahead of the curve and, today, provides lifetime income options that allow you to keep your remaining account value for your heirs and enjoy a guaranteed lifetime income. 

With very simple planning, a $325,000 investment (could be a 401k rollover, an accumulated IRA, a lump sum pension, accumulated savings, or a gift from Uncle Bob), if put into the appropriate fixed indexed annuity with a guaranteed lifetime income rider for five years at 6.5% compounded annually (available at the time of this writing), just created a guaranteed $2,000 a month income you can never outlive. At the time of your death, the entire current account value belongs to your heirs immediately. 

For those monies you want to take out in five or ten years for that boat, cabin, or world tour chasing the next Led Zeppelin around the planet, we do not need, nor want, an income rider, however we do want the upside potential of the market with no downside risk. Once again, the insurance industry has an option. 

A fixed indexed annuity allows for just this opportunity. Current upside potentials range from 12.6% to 30% in a monthly sum allocation to the S&P 500, but more importantly, provide no downside risk. This means you can participate in market gains, lock them in annually, and the worst possible scenario is a 0% return in a particular year. Some of these accounts provide an upfront bonus of as much as 10%.

For your immediate money, I’ve got bad news, which is for those monies; you need to keep them liquid. This should be 3-6 months worth of your expenses. Unfortunately, we’re stuck with money markets, savings and checking accounts. Or, given the feeble returns, under the mattress may look attractive.

Bank Rates

Loan Type Graph Rate +/- Last Week
30 Y Fixed Graph 4.22% dw 4.27%  
15 Y Fixed Graph 3.19% dw 3.24%  
30 Y Fixed Jumbo Graph 4.37% dw 4.42%  
5/1 ARM Graph 3.30% dw 3.33%  
5/1 Jumbo ARM Graph 3.35% dw 3.38%  
Loan Type Graph Rate +/- Last Week
$30K HELOC Graph 4.38% dw 4.54%  
$50K HELOC Graph 4.06% dw 4.09%  
$30K Loan Graph 5.07% dw 5.08%  
$50K Loan Graph 4.55% dw 4.56%  
$75K Loan Graph 4.55% dw 4.56%  
Loan Type Graph Rate +/- Last Week
36 M New Graph 3.06% -- 3.06%  
36 M Used Graph 3.28% dw 3.29%  
48 M New Graph 3.05% up 2.96%  
48 M Used Graph 2.88% dw 2.96%  
60 M New Graph 3.08% dw 3.21%  
Loan Type Graph Yield +/- Last Week
6 month Graph 0.36% -- 0.36%  
1 yr Graph 0.60% -- 0.60%  
5 yr Graph 1.45% up 1.44%