Retirees Getting Screwed — One Last Time

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by John Rubino, Dollar Collapse:

To understand the impossible situation in which most retirees find themselves, let’s begin with interest rates.

When governments raise or lower the cost of credit, they’re communicating with the rest of us. Higher interest rates send the message that “cash is more valuable, so save more and spend less.” Lower rates say the opposite: “Cash is cheap so borrow and spend.”

Over the past few decades, governments have borrowed ever-greater amounts of money to fund promises ranging from global military empire to cradle-to-grave entitlements. To make these mounting debts manageable they’ve lowered interest rates to encourage individuals and businesses to borrow and spend, thus generating higher tax revenues.

The resulting surge in borrowing has produced a series of ever-more-extreme booms and busts, with each bust requiring even lower interest rates to re-ignite growth.

Why does this hurt retirees? Because as a person approaches retirement age they naturally want to shift more of their nest eggs into fixed-income investments like bond funds and bank CDs. These instruments pay interest and carry relatively little risk, which makes them a safe way to generate income in retirement.

Most of today’s 70-year-olds were told back in their younger, high saving days, to expect an interest rate of 6% or so on their money. So they accumulated amounts that, when earning 6%, would produce enough to live on in retirement.

But a funny thing happened on the way to that perpetual income stream: Interest rates just kept falling as governments, even during economic expansions, needed artificially-low rates to stay solvent. So retirees who expected to live on fixed incomes found that that was impossible.

Not to worry, said governments and many financial advisors, just shift into assets like junk bonds and equities that are only slightly riskier but generate way higher returns, frequently 10% or more per year. Many retirees, seeing little alternative if they wanted to avoid going back to work, did as they were advised.

And now, of course, those “high return” assets are collapsing, sucking retiree nest eggs into a black hole from which they might never escape.

Meanwhile, about your pension

Teachers, firefighters and other public sector workers depend on (frequently very generous) pensions for their main retirement income. But the managers of those funds face the same dilemma as individual savers: They have a return target that they have to meet in order to pay out the promised amounts, but as interest rates plunge the fixed income part of their portfolios isn’t doing its job. In response, most pension funds have loaded up on stocks and junk bonds. And — because they’re institutions with more flexibility than individual savers — they’ve also embraced “alternative” investments that promised even higher returns. From a February Institutional Investor article:

Read More @ DollarCollapse.com

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