Forbes 6/26/13, Barry Glassman
Seniors and retirees may finally get their turn. For years, low interest rates have supported the economy, Wall Street, housing and corporations to the detriment of those who rely on investment income – namely retirees. As most of my clients are near or in retirement, they should be thrilled with rising interest rates. Here’s why:
- They don’t need to borrow money: Those who are hurt by higher interest rates are dependent on intermediate and long-term rates and typically fall into two camps: the consumer borrower looking for a mortgage; or corporations, municipalities, and government entities. Those who still have mortgages and have the proper credit have already refinanced their mortgages, most likely more than once.
- Their portfolios were positioned for higher rates: Rates had nowhere to go but up. I love the quote from Greg Valliere, Chief Political Strategist for the Potomac Research Group, “EARTH TO MARKETS: A move to modestly higher interest rates was perhaps the most telegraphed event in recent market history. It was inevitable.” With so much expectation, the market reaction last week was somewhat surprising. So while our bond strategy is not immune to rising interest rates, we certainly mitigated most of the downturn.
- They’ll need less capital to generate income: Over the past five years, retirees have seen their income streams dry up as historically low interest rates helped to prop up our faltering economy. They needed larger portfolios in order to produce enough income to maintain their lifestyles. Now, 10-year Treasury notes are paying 60% more than they were just six weeks ago meaning that $100,000 of Treasuries that were paying about $1,650 are now paying roughly $2,600. The result – retirees won’t need more capital to produce more income.
- The dream of a 4% or 5% safe yield is a little bit closer to reality: The closer “safe yield” gets to meeting the income needed from portfolios, the less retirees will need to rely on the stock market to succeed financially through retirement.
- Rates are rising without inflation: Many times in the past, rising interest rates came with rising prices. While I’m not suggesting that healthcare deflation is coming, at this point, inflation is benign while future portfolio income is on the rise.
While rising interest rates are bad news for those who haven’t refinanced or jumped to buy a house, or even municipalities who face higher refinancing costs as their current debt comes due, this could be the beginning of better times for retirees.