Ultra Low Interest Rates Have Hurt Retired Investors

Investors are increasingly focused on the task of finding retirement income. Sadly since 2009, one and two year CD’s have earned much less than 1% a year. On the other hand, inflation has been over 2% a year. The result has been a significant loss of principle as many retirees have had to cash in their CD’s to make up for the income shortfall. Since 2009, most CD’s have lost 6-10% of their purchasing value to inflation.

In this graphic, CD rates have been under the black line (inflation) most of the time since 2002.

CD's Inflation
Many income investors have responded to the failure of CD’s in this ultra low interest rate world by investing in diversified income portfolios. Diversification smooths price fluctuations and puts money to work in places that provide income and sometimes appreciation as well. These portfolios are generating income above the rate of inflation and preserving purchasing power but they don’t have the fixed price guarantee of a CD. That is the tradeoff. Fluctuating account value with sufficient income or fixed account value with insufficient income.
It is believed by many respected analysts that in the next few years inflation is very likely to make a return. Income investors should be positioned for that. Diversified income investing can offer solutions should interest rates and inflation begin rising and can even look to profit from it. On the other hand, CD investors will have to keep investing short term in ultra-low interest rates until rates get higher. That means more of the same slow loss of purchasing power and draws on principle.

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Wealth Building Secrets of Middle Class Millionaires: A Financial Analysis

In comfortable middle class neighborhoods across America there are families that are just getting by and those that are more than financially secure. The view of their lives from the street probably can’t tell you much. Their incomes and educational attainment may even be similar, but some in any neighborhood are millionaires, while others are carrying a lot of debt and saving little.

Often outward appearances are misleading. The luxury SUV in one driveway may announce success, but if leased this status symbol is just an expensive monthly liability. The four year old sedan in the neighbor’s driveway is probably paid for and still worth $15 – $20,000 with a service life remaining of perhaps 10 years.

All the neighbors may know and even envy one family’s Caribbean vacation last winter, but was most of it put on a credit card? Borrowing for consumption is different than borrowing for a long lived asset like a car or even an education that will provide higher earnings. As a rule, middle class millionaires pay cash for entertainment and goods. Not only does it avoid borrowing costs, but it helps keep the cost in line with the reality of a household’s budget.

Interest costs, excess spending and buying and selling of homes and autos all add extra costs. Middle Class millionaires are low key and stay in their homes, hold onto their cars and don’t borrow to consume. The thousands they save every year is available to invest and grow their wealth.

Middle class millionaires probably haven’t been divorced. Divorce is one of the most financially damaging events that can happen in a person’s life. Generally their lifestyle choices follow the dictum of moderation in all things.

Education is the biggest indicator of affluence. That statement doesn’t stand on its own anymore. It is possible and actually common nowadays for people to spend too much money on an education that doesn’t yield the return they expect. The number of people with post secondary degrees today is much higher than it used to be. People really do need to think hard about the return they will get on their education dollar.

That said, it is tangible useful skills that create value and wealth. A skilled plumber is a valuable worker. There are bachelors degree programs today that are not as valuable, yet the cost of those degrees is tens of thousands of dollars greater than the cost of the training to be a plumber. I personally know a master plumber who didn’t graduate from high school but at the age of 50 is probably already a millionaire.

Middle class millionaires steadily invest in retirement plans, maximize employer match’s and invest in businesses that yield cash flow. They have the money to do so because they have been careful with their spending. After years of modest but well executed financial investments and choices, not only is it likely a portfolio has substantially appreciated but the value of dividends, business income and interest can more than support their retirement.

Financial success doesn’t have to be outwardly apparent and usually doesn’t happen quickly. Millionaires live in modest neighborhoods everywhere. It is a valuable exercise to consider how they got that way. Can you think of any middle class millionaires in your neighborhood?

 

 

 

 

 

 

 

 

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Stock Markets Rising

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Pax Bernankus Must End

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Partying Like It’s 1999

Value and Diversification Have Been Forgotten Before

In 1999, stock market traders had their best year ever. The Nasdaq index doubled in value and small investors, institutional investors were chasing performance. The financial media fanned the flames showing the phenomenal returns realized by those who had concentrated their investments into the tech stock and growth stock craze and characterizing value stock investing and bonds as “has been” ideas.

Meanwhile, serious investors weren’t enjoying the party. They were not heavily invested in the growth stock boom since there was no justification to do so if value and income criteria were taken into consideration. In 1999, value investor Warren Buffet’s Continue reading

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Will Mortgage and Interest Rates Go Much Higher?

Can interest rates go higherCan interest rates go much higher?

For much of the past year the 30 year mortgage has been at 3.5% an amazingly low level. The ten year Treasury Bond has been also extraordinarily low between 1.5 and 2.0%. This has been not only amazing but necessary. Lately, however rates have risen to 20 month highs. It’s not ridiculous to wonder if interest rates CAN go any higher?

Normally, interest rates are Continue reading

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Income In Retirement – 3 Good Reasons NOT to plan for it!

retirement planning

Seriously? Yeah, like when?

How many excuses do you have to NOT plan for your retirement? Do you even know how much income in retirement you will actually need? Have you ever sat down and crafted a plan to determine the kind of life you’d like to lead, not the kind of life you have to lead – based on the long term needs for cash?

We all have our excuses; and it usually comes down to fear of the unknown. Then people worry that it’s Continue reading

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Retirement Planning: Can Social Security Pay You More?

Retirement PlanningRetirement planning is about saving, investing and planning but who gives Social Security much thought? Well, it is there, isn’t it?  Yet how do you decide when is the best time to start taking benefits? Does everybody understand what they need to know about taking into account the benefit of a spouse or former spouse? Is it better to Continue reading

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Graduates Change Their Parents’ Financial Priorities

Financial Priorities ChangeHot May weather often accompanies graduation day. As well turned out families and cap and gown clad graduates sit in the hot sun or crowded auditoriums waiting to receive their diplomas, they can ponder their achievements and what might lie ahead?

Parents fanning themselves in the crowd are thinking Continue reading

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April 2013 Podcast

This April, we talked of the economy, Quantitative Easing, and how 2 gentlemen’s stories impressive and inspiring – George Soros and Warren Buffet – inspired me to head into the Stock Market business in the first place. To be known as ‘The Man Who Broke The Bank Of England’ was obviously not a good thing, but just the fact that he was able to do it! And, of course, Warren Buffett is one of the greatest financial investors of our times.

George Soros

Warren Buffett

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