Retirement investing and low interest rate challenges for seniors
Today’s seniors face different challenges than their parents 30-40 years ago, including increasing life expectancy, higher health care costs and low interest rates.
With improvements in healthcare comes an increase in life expectancy. People are living longer. Someone born in 1977 can expect to live nearly a decade longer than someone born in 1947 (World Economic Form) which means we need to plan for our retirement nest egg to last significantly longer. So unless you delay your retirement by 10 years, you need to plan for your retirement income to last 10 years longer.
With increasing longevity and rising health care costs, it’s likely that some of your greatest expenses will come in your final years. This means planning for the possibility that a large portion of your savings may be required the farthest down the road. An estimated 63% of Canadians believe they will eventually move into a nursing home which can be a hefty expense late in retirement (Senioropolis)
The current low interest rate environment also raises some challenges. Seniors today (primarily Baby Boomers) were building households with children, mortgages and debt during the years when interest rates were at all-time highs. They saw interest rates hit double digits on their mortgages and loans during their high-consumption, family-raising years.
All the while, they watched their parents amass GIC portfolios paying attractive double digit rates of return at the time. Many hoped to one day reap the benefits of high interest GIC’s when it came for their own retirement savings, but double digit GIC’s are now all but a distant memory.
In recent years the steadily declining interest rates have stayed. Some senior investors had hope for interest rates to swing back up like they did in the 80’s as they now sit squarely in the saving stage rather than the borrowing stage of life; but that’s highly unlikely.
Government bond yields have declined for decades and experts tell us we can expect rates to remain low. This is most likely the new norm, or as some say back to the long term norm.
Our individual perspectives are coloured by what we have seen in our lifetimes. If you are a senior today who experienced high interest rates through much of your life, the natural tendency may be to wonder when they will return to normal.
But what if what you have experienced as normal is simply representative of a blip in the long term history of interest rates? What if it just so happens the majority of your lifetime has fallen within a bubble of temporarily high interest rates?
Taking a broad look at long term of interest rates using history of the US 10-year Treasury Yield, there are roughly one hundred plus years of rates hovering on average between 2% and 4%. In 1965 these rates began to rise peaking around 16% in 1979 before making their way back down again.
What drove the interest rates up so high during that period of time? Economists will tell us the significant growth interest rates over this timeframe was driven by the bubble of the baby boomers. The influx of population making their way through the high consumption stage of life drove up the demand for products and services, homes, cars, loans etc thereby driving up interest rates and inflation along the way.
As that bubble made its way through, and population rates started to come back down and normalize we saw the slow return to a lower interest rate environment. Global population rates are expected to remain low.
When investors ask about the probability of a return to higher interest rates most economists will tell you it is not likely we will see them rise again to those levels. In the big picture the past several years of reducing rates from their highs have been part of a larger a process of coming back and normalizing with the long-term lower interest rate trend.
Needless to say, exceptionally low interest rates as we are in currently, create challenges for senior investors. It can be hard to attain growth for the risk adverse investor. Income generation in a low yield environment is difficult.
Investors are re-evaluating to what degree they can tolerate a low level of risk in their portfolio with the intent of earning some income growth to help grow and preserve a larger nest egg for longer life expectancy and rising health care costs.
Income investors can benefit from investment options with a blending of fixed income strategies. Investment solutions that seek both income and wealth preservation with regular distributions that can provide some growth opportunities but also offer some downside protection.
Work with a trusted advisor who can build you a portfolio to match your risk tolerance and objectives and manage your investments to suit your needs.
Column appeared in This Month In Elgin Magazine February 2021 edition
Stephanie Farrow, BA., CFP., Stephanie has over 28 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010. Stephanie and her husband own Farrow Financial Services Inc. About our Farrow Financial Team.