With the Federal Reserve in the U.S. announcing that rates will be kept low until into 2013, Canada's own government bond rates have dropped and will most likely stay relatively low for the next year and half as well.
What does this mean? With an almost guarantee of low rates for the next few years this will mean something very different to 2 groups - the savers/investors and the borrowers.
Savers & Investors - Low rates mean low returns on the safest investments. This means bonds, GICs and term deposits. With so many baby boomers looking at retirement over the next dozen years (or much sooner) they want a good return to build up their retirement fund. The reality is that returns will be low, unless they go into riskier investments like mutual funds and stock markets. However, principal and returns are not guaranteed with mutual funds and stocks, so investors need to be careful how much of their portfolio they put into the riskier investments while hoping for higher returns.
With investments earning lower returns, baby boomers will need to invest more of their money each year to get to the desired investment amount. Hopefully they will not have a mortgage or credit card debt any more and be able to put those funds into their retirement savings.
For people who are already retired and depending on cash flow from investments, these low rates will hurt, and they will hurt for a few years. Your biggest priority is to protect the money you have saved over the years. Do not invest in something that could lose your principal, unless you can afford to put some of your savings at risk. Your second priority is finding somewhere to get some returns. That will be difficult as no risk means almost no returns. I would recommend talking to a financial investment expert to discuss what you can do. Otherwise, the next few years will probably mean living life a bit more frugally than you had planned 5 years ago. Doesn't sound like fun, but our grandparents were able to do it and I'm sure the baby boomer generation can do it as well.
Borrowers - These low rates means the interest cost on housing, vehicles and other types of loans is at an all time low. While this is good for the interest you currently pay, it has a side effect of promoting the purchase of more or bigger items that people would when rates are at more normal levels. I would encourage everyone to take advantage of the low rates to make additional payments that knock debt down quickly and can free you from interest payments when the interest rates start to rise, which they will eventually.
So, savers and investors will have a tough time for the next few years. If you are not retiring for 15 to 20 years you can have confidence that rates will increase sometime in your time horizon. If you are ready to retire or have already retired, I hope you are debt free and have a good budget that you can live with. For borrowers, don't fall into the trap of spending more than you should, because if you are locking into a 5 year mortgage today, when it renews in 5 years the odds are that rates will be higher, possibly 50% higher. To everyone I say - Protect yourself, plan ahead, and you will be able to ride out the bumps in the economy better than those who do not plan. Jerry
Why can't the credit union give seniors better rates so they can live off their investments? We have been members for years, and when we need you we are given almost nothing. I don't have much, so I depend on the government money, it isn't enough. If the credit union did more for senior's investments, I wouldn't have to ask my children for help.
ReplyDeleteDear Anonymous, Rocky Credit Union works hard to go the extra mile with all our members, but most especially with our seniors who have been members for years. We provide free unlimited chequing accounts for members 60 and up along with quite a number of other perks.
ReplyDeleteRegarding the rates on current investment and savings accounts, we are proud to say we have very competitive rates. Unfortunately, with mortgage rates being so low right now our term deposit and savings rates are held at a low level. It is an unusually time as rates have never been this low before, and they have stayed low for the past 2.5 years. According to most economists we will not see rates rise much at all for the next 2 or 3 years, meaning that many seniors will have difficulty as their cash flows will be limited by the low rates.
I recommend talking to a financial advisor about your situation. There may be investments that can better suit your needs than your current portfolio provides. I wish I could be more positive for you, but I think it will be a tough few years for all those who have limited incomes. Good luck, and please seek professional advice. Jerry
I am curious as to whether 'Anonymous' pays rent or owns his/her own place. The biggest expense that any family has is shelter and if you don't own, you always have that large bill. With the price of homes these days, I think it's going to be more difficult for people to own. The standard of living will deteriorate so I think people need to adjust their expectations. With reference to children helping out their parents, it's refreshing to hear-normally it's the other way around.
ReplyDeleteDear Younger Generation, we are seeing a bit of a split in people who would like higher rates in retirement. Seniors who were born before 1945 who were raised during the depression or WW2 era tend to try and save a lot, barely spending anything, and paying off their house, but they also didn't make much and gave a lot to their kids. They want higher interest rates to help them just survive.
ReplyDeleteThe other group are Baby Boomers who upon reaching retirement find they haven't saved enough. Unlike their parents who made little but saved as much as possible, most Baby Boomers made much more than their parents but also spent it, and are now retiring with mortgage debt and annual trips to Jamaica or somewhere else. This group is hoping for higher rates so they can still fund their lifestyle, but I think many Canadians in this generation is going to find their expectations will be much higher than the reality. Jerry
I have tried to teach my children to save money, work hard and avoid debt. They haven't listened to me all that well, and as adults they have made mistakes that could have been avoided if they had listened better. I guess each person has to learn by making mistakes. Still I'm glad the credit union is trying to teach people that you should save money and avoid debt. These low rates won't last forever.
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