Baby boomers: They came of age at a time of labor market prosperity, when middle class jobs were more abundant and earning a decent wage was easier. They’ve more often been able to do what millennials and Generation Z may see as fraught territory — own homes and skip college — while still earning more throughout their lifetimes.
But the current is now going against them in the form of zero-to-nothing interest rates.
Boomers aren’t first in line to benefit from the low-rate world that has saddled the market for more than a decade now. Cheap borrowing costs make buying things like homes and cars and taking out college loans more affordable, but that doesn’t matter as much to older U.S. adults. Meanwhile, low rates strain yields on the fixed income baby boomers will lean on for money in their retirement, all the while making it harder to outpace inflation.
Low rates are part of the reason why a financially secure retirement is becoming harder than ever, especially in the U.S., which ranks 16th out of 44 other developed countries, according to the 2020 Natixis Global Retirement Index.
The coronavirus pandemic has made that situation even worse. Bond yields have plummeted to their lowest levels ever all across the curve and have little room to run during the Federal Reserve’s whatever-it-takes strategy. A new policy out of the U.S. central bank geared toward boosting price pressures could also weigh on boomers’ wallets.
“To some degree, baby boomers are going to suffer the most right now because they’re in an income-required phase of their life rather than an equity-focused stage,” says Tom Bradley, head of fixed income at YieldX, a fixed-income software vendor. “There is yield out there. It’s how you find it and how you make sure it’s consistent with your risk tolerance and your lifestyle.”
Here’s five steps you can take to fight back against low interest rates and set yourself up for prosperity in the longer run.
1. Stash as much cash as possible, even if you won’t make much from saving it
You might not earn much money on the cash you’re stashing away, but saving is still an important part of your strategy, particularly for baby boomers who might be leaving the workforce soon.
“Cash is what helps you sleep well at night,” says Gary Zimmerman, CEO and founder of MaxMyInterest.com. “You know that it’s there, and you don’t have to worry about it fluctuating in value.”
Rates have plummeted over the course of the coronavirus crisis, but there may still be opportunity for you to find a higher yield. The average rate on a savings account in the U.S. is 0.05 percent annual percentage yield (APY), according to the FDIC. That compares with several other online banks on the market that offer around 0.70 percent APY. It might not seem like much, but it still adds up. According to Bankrate’s savings calculators, that would be a difference of $329.90 over the course of five years on an account balance of $10,000.
Money market accounts might not be the best option right now
Other options for parking your funds include money market accounts, which historically have offered more competitive rates than traditional savings accounts as well as check-writing abilities. But with low rates across the board, they might not be as much of a competitive option anymore.
2. Analyze your finances as well as your short- and long-term goals
Use your savings account to store the cash you might need over a shorter time frame. Examples include a six-month emergency fund, which might be important for older Americans if they need to finance unexpected health care costs. Others on the brink of retirement might consider having at least two years of their income on hand to help get them by, so they don’t have to sell assets at a low price in the event of market volatility.
Other reasons for storing money in a savings account include financing goals they have in the shorter-term, whether that be taking a vacation abroad, doing a home renovation or buying a new one.
How much you need to sock away might be different depending on whether you’re working or retired and whether you’re drawing your pension or Social Security benefits.
“You want to have the funds accessible when you need them. You can’t really take a lot of risk,” says Danny Michael, CFP, founder of Satori Wealth Management who specializes in advising baby boomers. “Once you determine that, you have a better understanding of what your income needs are, and you can position the portfolio to make sure you have enough in safe assets to live off of.”
3. Once you know how much you’ll need in the short term, diversify your portfolio for those long-term funds
Once you have enough cash on hand to keep you going over the shorter-term, that’s where diversifying your portfolio comes in. A low-rate world typically means you’re going to have to get comfortable with taking some level of risk, though how much depends on your tolerance, level of comfort and specific financial situation.
“You will see more volatility, but you can afford to take more risk because you’ve covered all your financial needs and addressed your income shortfalls,” Michael says.
Making a decent return on safe investments is much harder today than it was decades ago. Baby boomers and retirees, for example, used to be able to pour money into certificates of deposit (CDs), including taking advantage of strategies such as CD laddering, when looking for a safe yet rewarding return. Those savings vehicles compensate investors with a higher yield in exchange for locking away their money longer. But in today’s low-rate world, CD rates aren’t much more competitive than savings accounts.
Another similar investment companion to CDs is bonds, but those returns aren’t likely to edge up anytime soon, amid the Fed’s massive bond-buying program. If you were going to lock away your money right now in a 10-year Treasury, arguably the safest investment option on the market, you’d earn next to nothing at a rate comparable to that of a savings account: 0.87 percent, as of Oct. 22. Accounting for inflation, that yield would be even less. Consumer prices edged up 1.4 percent over the past 12 months, higher than all but two Treasury yields: the 20-year and the 30-year.
Look beyond the typical boomer-friendly investments: bonds, cash and savings vehicles
Every situation is different, but some advisers may recommend a 60 percent stocks/40 percent bonds allocation, according to Michael. Though if you’re looking for a way to invest money you might not need in 15 to 20 years, equities do tend to outperform over that time frame, he says.
Other opportunities are out there if you’re willing to chase them.
“Embracing a different investment mix means more short-term volatility but better odds of generating the income needed now and sustaining the portfolio over their life spans,” says Greg McBride, CFA, Bankrate chief financial analyst. “Generating income needs to come from across the portfolio – dividend paying common stocks, preferred stock and real estate investment trusts in addition to bonds and cash.”
Other investment options could be municipal bonds, high-yield corporate bonds and emerging market bonds, and closed-end mutual funds, according to Eric Diton, president and managing director of The Wealth Alliance.
“There are two choices: reduce spending, which most of us do not want to do, or invest in alternatives to generate more income, which may mean taking more risk,” he says. “In all cases, we recommend professional management and diversification.”
4. See if you can cash in on low interest rates by refinancing your mortgage
Many individuals between the ages of 56 and 74 may have already paid off their mortgages. But if you haven’t, refinancing could be a clear way of taking advantage of this low-rate environment while freeing up cash to be allocated toward other goals. Make sure, however, that you consider any fees or closing costs and calculate whether you’ll end up saving more over time by trimming your monthly payment.
“There are other opportunities and benefits to low rates, and part of that is, borrowing rates are much lower,” Michael says. “If it makes sense to refinance, it can save you a lot in cash flow going forward.”
5. In some cases, working longer and generating income for savings may be the best route
With retirement prospects clearly threatened by low interest rates, one option might be to delay your exit from the workforce for as long as possible. That could give you more time to assess your financial portfolio and its shortcomings, as well as save up more that can either go toward your short-term goals or longer-term investments. An October survey from Charles Schwab, for example, found that individuals have less than seven years worth of their retirement income saved up.
“Working longer and saving more is also a reality many near retirees may have to contend with,” McBride says. “Older baby boomers haven’t been able to rely on the interest income from bonds and cash investments the way previous generations of retirees have and younger boomers that are approaching retirement face the same prospect.”
Part of the reason why rates are so low today is because “banks have been absolutely flooded by deposits,” Zimmerman says. “You’re seeing a bit of a race to the bottom.” Banks’ hesitance to lend that money out hasn’t helped the problem, but it also means on the flip side there’s potential for savings accounts and CD rates to climb even before a Fed rate hike if those trends abate.
Even then, however, rates are unlikely to climb across the board or reach levels seen decades ago. With these crosscurrents here to stay, working with a financial adviser might be the best route to go.
“That’s the problem that zero rates create globally: It distorts risk,” Bradley says. “You have to take more risk to get more yield; therefore, you need to get better advice or better tools to understand what risk you’re taking to get yield and be in the right product.”
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