From the desk of Peter Blatt
April 19, 2012
Currently the world central banks, and those of our own government, are having the effect of Waging War on Seniors, Savers and Retirees.
Our Federal Reserve policy has reduced short-term interest rates to nearly zero. This means that if banks take in cash deposits and buy government securities, they receive virtually nothing in return. Therefore, they cannot pay anything out to the customer who gave them the cash deposit in the first place. This is the main reason CD rates are at an all-time low.
If the customer wants to lock their money up for an amount of time, the bank can buy a longer-term treasury and receive a little more interest, but there’s still not going to be too much left to pay the customer, especially when the bank’s cost of administering the account is taken into consideration.
This is one reason why Bank of America and other large institutions are looking around to find ways of charging customers. Banks are now known for their hidden fees and “maintenance” fees on their accounts.
Make Income not War
We describe the current low interest rate environment as “War” because it effectively penalizes those who save by dramatically reducing their level of income and the number of places they can find a reasonable income return.
Traditionally, an individual is in the Accumulation stage of investing during their working years. Once they retire or are about to retire, they need to shift to the Preservation stage of investing. This is the stage where income on your investments is essential. The key during the Preservation stage is to preserve your principal and gain income on your money.
The War on Retirees is causing a failure of the Preservation stage of investing. Without the ability to earn 4% or more of consistent, readily-accessible, low-risk income, the ability for retirees to move from the Accumulation stage and on to the Preservation stage is severely curtailed.
In many cases, assets accumulated during employment are now being spent-down in an attempt to meet regular living needs. The spending down of your principal assets can cause you to run out of money in the future. Also without some growth, your portfolio will not keep up with inflation!
This is one of the main reasons why we work with institutional money managers to offer conservative income-generating portfolios. Even if their values may fluctuate, there’s always a positive level of income being generated.
In the next article, I'm going to discuss what we call the conservative income-generating portfolios in greater detail.
Until next time,