The War on Retirees

In its battle to help the economy, the government and the Fed have waged war against retirees and near-retirees while making the prospect of a secure retirement much less likely for everyone.  Retirees typically look for income from their investments and are generally wise to seek assured income in retirement so as to secure their futures.  But the current interest rate environment, near all-time lows, makes the provision of guaranteed income and the receipt of reasonable yield on fixed income investments essentially impossible. 

Most people think that a $500,000 nest egg is a pretty good achievement. Lots of people with $500,000 in retirement savings feel rich. However, in today’s economy half-a-million dollars cannot be expected to provide more than $25,000 in annual income.  That’s nothing like rich and lots of people are hoping to get by on much less, which is of increasing concern due to there being fewer and fewer pensions available. 

This reality is pushing many retirees into far riskier assets like equities, junk bonds and alternative investments such as REITs, both traded and non-traded.  Obviously, that kind of risk is, well, risky and thus dangerous for a retiree who is counting on that money to live and who doesn’t typically have the opportunity to go out and earn some more if problems ensue.

Insurance companies have created some excellent and innovative tools to provide guaranteed income, but they can have risks too and sometimes come with high fees attached. Moreover, carriers are constrained by the interest rate and investment environments too.  Yet the federal government sits idly by allowing a patchwork collection of state guarantee associations solely to bear the risk of backstopping these carriers in the event of financial difficulty instead of instituting an insurance equivalent of the FDIC, financed not by taxpayers, but by the premiums of member carriers.

Those saving for retirement face similar challenges.  Finding promising investment opportunities is difficult while “staying the course” is both more difficult and more fraught with peril as retirement nears. Investors nearing retirement ought to be taking risk “off the table” systematically and comprehensively.  But finding a reasonable investment choice for money that was in equities with reasonable risk parameters and the prospect of a reasonable return seems impossible.

It is understandable for the government and the Fed to want to get the economy moving again.  But they don’t seem to be getting any bang for their buck – actually many bucks.  For example, despite the crazy-low interest rate environment, bank lending remains down.  Yet these same banks are collecting interest from the Fed (per the bail-out) on the money that they aren’t lending while borrowing essentially for free.  When banks borrow money for almost nothing and lend it back to the government risk-free the banks collect guaranteed income.  According to Institutional Risk Analytics, the net interest margin made by U.S. banks in the first six months of 2011 was $211 Billion, leading to $58 billion in profits. 

So banks are getting huge amounts of guaranteed income for not doing what they are in business to do and what the Fed is trying to incentivize them to do while retirees can’t get decent income anywhere. Thus many banks have joined the war on retirees. The price being paid by all of us, and especially by retirees, for remarkably little in the way of results in this war is, quite simply, way too high.  We need a truce in the war on retirees.


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