Low interest rates persist since the financial implosion of 2008. This low interest rate environment has profound implications for anyone trying to invest and save for retirement. 

For homeowners (or prospective home buyers), it makes sense to lock in these low rates by taking out a fixed rate mortgage. It's important to buy the right home - if you have to move in the future, you run the risk that rates could move up and you would lose the advantage of these rock bottom rates (currently in the 3-4% range).

For savers trying to accumulate money for retirement, low rates have been a bombshell that are unprecedented in our history. At the margin, savers can shop around for the best rates. As an example, money sitting in a savings account will typically earn zero interest. By simply moving some of this money into a series (ladder) of CD's (Certificates of Deposit), one can increase the rate of interest earned to somewhere in the neighborhood of the 1-2% range. Online banks like CapitalOne360 and Goldman Sachs may also offer much higher rates on savings accounts without fees or the need to buy CDs.

Financial planners have erroneously used the lower interest rates on savings accounts and bank deposits to convince many of their clients to move money into everything from mutual funds to REITS (Real Estate Investment Trusts). This has contributed to the  bubbles that have inflated all over the financial landscape, increasing the risk level for many investors. 

The only silver lining to this low interest rate environment is the relatively low inflation in the overall economy. A low inflation rate (or flat inflation rate) means $1 today will have similar purchasing power a few years down the road in retirement, as an example.

Savers should be careful not to move too much money into risky investments like stocks and bonds. An environment like this demands a higher degree of conservatism in your financial affairs in my opinion.

Negative rates have  become a reality in Japan and Germany and seem to be creeping ever closer toward the U.S.

It's an unfortunate byproduct of the financial crisis and part of a complex global economic picture. In an earlier time when savers could earn decent rates of interest on their savings, they were able to "live on the interest". Now they may have no choice but to "live on the principal". 

Low Interest Rates

What are negative interest rates?

Copyright © Todd's Tax Service LLC. All rights reserved.