In over 30 years of helping people accumulate the resources needed to make the successful transition from work life to retirement life, there have been many challenges that we have faced. Natixis Investment Managers recently released their 2019 Global Retirement Index. It seems that in addition to traditional, political and economic issues, a number of additional risks are facing our clients as they negotiate their retirement years. Among the risks are low interest rates, sequence of return risk, increasing lifespans and the impact of climate change on retirees. I will be addressing these issues in several posts over the next few weeks, starting with the first issue, low/negative interest rates.
Due to the fact that interest rates are near historic lows, the income that investors are receiving from bonds, CD's and cash in the bank may not be sufficient for them to maintain standard of living. Many of my baby boomer clients have accumulated assets and are looking to create current income to help support their retirement income goals. This is becoming much more difficult as central banks are lowering interest rates around the world towards historic lows. This includes having interest rates in Germany, France and Japan that are actually negative, something that would have been unthinkable just a few years ago.
Unfortunately, it seems that central bankers and politicians do not realize that the current level of interest rates are not holding back consumer spending or business activity. Does the Federal Reserve really believe that lowering interest rates and borrowing costs further will really help people buy significantly more homes, cars, household goods, etc.?
If you allow me to get on my soapbox for just a moment, I think the bigger question they should be asking is how are retirees supposed to survive and create the income they need to live on in a world with such low interest rates? There is a term that was coined in the 1970's called "Financial Repression". Essentially, we are rewarding people who borrow and take risk (think subprime mortgages and junk bonds), and we are subsidizing those activities by penalizing people who have low levels of debt and high levels of savings. It seems as though the central banks are playing Robin Hood and taking from the savers in order to finance additional borrowing activity. Let's observe the sub-par economic growth in Japan and Europe over the last decade to see how this experiment has worked so far.
Central bank policies are encouraging retirees to seek higher returns in riskier investments, at a point in their economic life cycles when they cannot afford to. Unfortunately, moving into riskier asset classes late in an economic cycle often time leads to volatility and downturns that are difficult to recover from during your retirement years. Just think back to '08-'09 financial crisis when many high yield and floating rate bond funds dropped more than 20% in short order.
As always, we are keenly focused on helping our friends and clients manage their resources throughout their retirement years. Being aware of and planning proactively for issues such as low/negative interest rates can help clients have confidence as they seek to enjoy family and activities during this new and exciting phase of life. We will continue to study these trends and work to help our clients understand how they could potentially impact them and their families. Please remember, if you have friends or family struggling with these issues, we would be more than happy to have a conversation to help them keep "Moving Life Forward" as well.