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Mon June 18, 2012
Low interest rates: Who wins, who loses?
The interest rate on a 30-year mortgage recently dropped to a record low. That’s great news for people buying a home or refinancing. But not everyone is thrilled about low interest rates. For retirees, Bellevue financial advisor Michael Boone says low interest rates are "incredibly destructive."
Take David Lee. He's 59 years old, getting close to retirement. When he first set up his retirement plan decades ago, he says he was told he’d earn 10 percent interest and he’d have enough to buy another house when he retired. So much for that.
"My whole thought process for the last 30 years was work toward retirement, have a house when I retire. That's not going to happen," he said. "Have enough money to retire and live comfortably - that's not going to happen. The interest rates have shot me all to heck."
For many years the dogma has been that as you get close to retirement, you should put your nest egg in something safe – like Treasury bonds or a certificate of deposit. The thought was that you’d avoid the ups and downs of the stock market and earn more interest than the rate of inflation, so your nest egg wouldn’t shrink. But now, rates on things like certificates of deposit have dropped far below the rate of inflation, so you actually lose money.
Boone says for baby boomers, today’s extremely low interest rates are a triple whammy.
"They went through the dot-com bust, and maybe that hit them. Then they thought, at least it's safe, I'll put the money into my house and then they got hit by that," Boone said. "And so, these people already don't have as much money as they need, and now they're looking at retirement and drawing an income at miniscule rates."
The Federal Reserve has been keeping rates low as a way to get people to borrow money and jumpstart the economy. But Boone says retirees lose out. The only thing for them to do, he says, is find investments with higher returns – maybe stocks that pay dividends.
"Unless you're willing to step up a little bit in risk, you're going to lose money to inflation and taxes every single year and it's not getting better," Boone said.
The Federal Reserve has said it will probably keep interest rates low through at least 2014.