In July, the New York Times headline read:
Rates at Rock Bottom Are Expected to Linger in Fed’s Latest Forecast.
What does this mean to current and future retirees?
Low interest rates are on the minds of investors around the globe. What should you do with the cash in your accounts earning almost no interest?
Are you trying to time the market? Successfully timing the market is the result of dumb luck. Is it for an emergency fund or a known purchase (Condo, car, vacation?) The interest rate shouldn’t matter. You want all the money to be there when you need it. It is a mistake to have a lot of excess cash (above the amount needed for a purchase or emergency) waiting for interest rates to jump up. It’s not happening any time soon. Are you using it for income? Taking income from an account paying nearly zero will deplete your account quickly. Big mistake.
A Better Strategy:
A strong retirement plan includes an annuity for safety of principal, monthly income and more growth. Often investors and/or their advisors don’t consider it for lack of understanding or they’ve been misinformed.
With $500,000 invested in U.S. Treasury Securities, a 70-year old woman will earn $5,550 a year. But with an annuity payment, she’ll generate $33,200 after tax for annual income. Each year in Treasuries cost her $27,650 in lost cash flow. Over three years that’s $82,950 of lost income while she’s waiting for interest rates to increase significantly.
If you’re using bonds for income when interest rates go up, the underlying price of the bond will go down, decreasing the value of your portfolio. Consider a review of your current plan with an expert retirement planner and consider the right annuity for income.
The Fed’s says it plans to keep interest rates low until 2022. After that, no one knows.
But, they’re not likely to jump to 3%. The period of low interest rates could last a lot longer.
As you can see, there’s a cost to waiting. There are some good alternatives available that will give you good growth opportunity without risk of losses and generate a larger, monthly income for life. Start shopping!