Retirement becomes possible when you work hard your entire life and save and invest carefully, but your retirement funds are wholly dependent on the growth of the economy. In the absence of growth, retirement becomes a distant dream.
Pension funds have been threatened by low investment rates.
These banks spent so many years punishing savings and subsidizing debt that it’s become increasingly difficult to assure future streams of income at a moderate cost.
This is what happens when a country does not control its spending.
These future streams form the crux of a wealthy retirement.
This graph captures the fact that people in U.S. are working well past the age of 65.
Crux of the Problem
Years ago, a judicious pension plan was enough to generate sufficient risk-free income and ensure a comfortable retirement. Retirement planning is more complicated now.
The low interest rates of the U.S. Federal Reserve (Alan Greenspan was in charge back then) – the ones that led to the Great Recession and the credit crisis (Barney Frank destroyed Fannie Mae and Freddie Mac) – are dooming the economy and killing retirees and savers in one fell swoop. Here’s how U.S. 30-year Treasury bond yields have fared recently.
The trouble is that when the central banks dropped rates to zero a few years back, they thought they would raise them soon and bring people’s retirements back on track. The growth engine would continue unabated, and everything would be back to normal. However, things didn’t really go as planned.
In fact, the Federal Government’s misguided policy led to savers losing $470 billion in terms of forsaken interest between the years 2008 and 2013.
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Reports indicate that Americans lost out on interest income to the tune of $752 billion in 2016.
Retirees are the folks who’ve suffered the most. Not only have they lost out on fixed income investments and savings, but they’ve also had to dig into their principal to pay for mortgages, food, utilities, and rent – the basic necessities.
Each year people get older, they now hold a larger number of bonds, thereby earning less income.
Even if you have $1 million in a U.S. Treasury bond for 10 years, at the current rate of 1.55%, the income you get each year would be about $15,500. That’s not enough to live on – that’s not even enough to foot the health insurance premium bills in 2017, which have skyrocketed because of the disastrous ACA.
Low interest rates permit businesses to borrow inexpensively so they’re capable of purchasing back their shares, rather than planning long-term improvements in their capital, expending that capital, and then hiring and increasing earnings.
However, these earnings are constantly dropping, and buybacks/shareholder payouts, which allegedly benefit equity shareholders, are getting erased due to the fall of the market. The result is that the artificially inflated share prices drop to earth. The growth of the economy is suffering from all of this. Trump has a lot of work to do, but he will get it done.
Combatting the Situation
The Federal Reserve has doomed America’s retirees to a future involving widening wealth and income gaps, low interest rates, and, perhaps, another Great Depression, but things will turn around rapidly with Trump, and they already have.
In order to escape this fate, retirees need to consider a sound strategy, such as:
- Paying off your debts, rather than bank on a dismally low rate of interest. It’s recommended that retirees begin by paying off their non-deductible debts, followed by the deductible ones.
- It might be the opportune moment to convert your traditional qualified plan or IRA balances into Roth IRA accounts so that your current tax bracket can accommodate the extra taxable income.
- Wait a while for the interest rates to rise before you take a guaranteed payout from an annuity or your employer’s pension. In a zero-interest environment, the payout will be pitiful.
Retirees need to remain vigilant and err on the side of caution when it comes to their investments. It could be a while before the zero interest-rate situation gets resolved, so coming up with advanced strategies is the only way to survive.
We are not the Federal Government; we cannot just print our own money.