The record low interest rate environment of the past few years has made it cheaper to buy a home, purchase a new car and even take out a personal loan. But for retirees this low interest rate environment has been nothing but a headache. After all, any money housed in a savings account isn’t generating much return, while their safe bets like bonds and CDs aren’t that hot either. But it’s not only returns on their investments that suffer. From the money they get from a fixed annuity to the increase in the cost of long-term care insurance, there’s a host of reasons why retirees will welcome more interest rate hikes this year. (Read more, here: How Interest Rate Cuts Affect Consumers.)
Redefines Safe Investment Bets
In order to live comfortably in retirement most people need to amass about 70% of their working income and then have that money continue to grow during their retirement years. It’s not a stretch to live more than twenty years in retirement, so you can’t just protect your money but you have to see it continue to increase. In a high interest rate environment that would be easier to do. Traditionally retirees could get a good return with bonds, CDs and conventional savings accounts. But in an environment where rates are staying at record lows, those yields are hard to come by, turning the whole idea of safe bets on its head for many retirees. No one wants to lose their money in the stock market, but at the same time they can’t let it languish in a low-yield rate environment where their investments aren’t even keeping up with the pace of inflation. With rates near record lows, retirees have to rethink their safe stance and have more exposure to stocks, which inherently are more risky. (Read more, here: Should I Invest in Stocks During My Retirement?
Annuity Streams Are Lower
One of the biggest appeals of an annuity is that you get recurring income for a predetermined period of time. For retirees it’s seen as a perfect way to access their money, all the while keeping it invested and protected. But in a low interest rate environment, the amount of income they are going to see monthly is going to be lower if they purchase a fixed annuity. That’s because the return you’ll get is locked in at the rate in which you open the account. Lock in the rate now and when the Federal Reserve continues to increase interest rates, you’ll lose out on the future returns. It’s the reason some investors are waiting for interest rates to increase before they purchase an annuity. (Read more, here: An Overview Of Annuities.)
Long-Term Care Insurance Premiums Rise
One of the biggest expenses retirees will face is health care costs. According to Fidelity Investments a healthy couple will spend $245,000 on health care during their retirement years, and that doesn’t take into account an unexpected illness or injury that can send those expenses through the roof. One way to protect against that is to take out long-term care insurance. While long-term care insurance premiums can get expensive, particularly the older or sicker you are, in a low interest rate environment you are going to pay a lot more for that peace of mind than when rates are on a upward trajectory. In a low interest rate environment, insurers see their investments suffer and as a result pass it on to customers in the form of higher premiums. (Read more, here: Long-Term Care Insurance: Who Needs It?)
Cheap Money Causes More Indebtedness
The last thing someone wants to do entering retirement is be saddled with a lot of debt, even if it is low-interest-rate debt. Ideally you want to enter your golden years debt free, and that includes no mortgage. But the record low interest rate environment has made it hard for many people, including retirees, to resist the temptation to spend on credit. The economy is improving, the job market is on the mend and you can get a car loan for less than a mortgage, so why not? But that debt can create a tough situation in retirement and could force you to have to downsize your lifestyle. In a higher rate environment, consumers may think twice about that new car before taking out a loan with a high interest rate attached to it.
The Bottom Line
The low interest rate environment we have been living in for the past few years has done a lot to stimulate the economy, improve the housing market and even get companies hiring again, but low interest rates aren’t the ideal circumstance for retirees. With risk aversion a major characteristic of many retirees, a low interest rate environment means their savings and safe investments are making little money. Not to mention that their income stream from annuities will be less at the same time that the cost of long-term care insurance will go up. It’s no wonder retirees around the country will welcome interest rate hikes this year and beyond.