Interest Rates are Forecast to Go Much Higher – That Puts Us in a Box

Eyes are anxiously turned to the future of interest rates. For years now, pensions and retired investors have suffered under the head wind of very low interest returns that were less than the rate of inflation. On the other hand, super low mortgage rates have supported rebounds in the value of real estate and, most prominently, the stock market. Super low interest rates have also enabled governments to run up huge debts without the public caring. But after 36 years of falling rates, the winners and the losers of suppressed interest rates are watching what happens next.

Thirty-six years of generally falling interest rates may be reversing and some very accomplished people say they are set to rise. Accomplished bond managers Jeffrey Gundlach, Bill Gross and Scott Minerd are predicting, or see scenarios, where rates work higher, even doubling, over the next four years…. and that would mean a new trend has come into place, a trend of rising rates. Sea changes like that matter a great deal.

Breaking a 36-year trend of falling rates will constitute a new economic era with new winners and losers, opportunities and problems. It would be big news. In 1981, interest rates were in the high teens. Imagine that? Falling interest rates meant borrowing to consume. Borrowing to build homes for investment became easier and easier, cheaper and cheaper. Imagine how that would change things if interest rates went the other direction?

Take, for example, the US debt. The cost of servicing the debt would rise in round numbers by $200 billion/year for every 1% increase in long-term interest rates. Add that to the budget deficit.

Take, for example, the stock market. Bonds aren’t much competition when the dividend yield on blue chips is the same as bonds. What if bonds yielded much more? Would money shift away from stocks?

What about property values? What do you think would happen if the monthly cost of the average new mortgage (which is about $300,000) were to increase by $600/month? Rising rates really could put us at that level in a year or two.

There may be winners. Higher interest rates would help pensions and retirees. Public pensions need to earn 6-7% a year. Rising rates would really help them. Public Pensions are only earning about 2.5% on their bonds currently. And that could double, or more.

It is interesting to consider that some very smart people are seeing an historic change coming in interest rates. It is one that affects us all.

There is another interesting aspect of this possible scenario. A better economy force rates higher which in turn triggers some very bad effects on the economy that may reverse the whole process or prevent the increase from happening at all.

The problem is, we are in a box. How does the economy deal with higher interest costs on the $145 trillion dollars of outstanding debt in the US economy? Rates just 2% higher would be adding close to $3 trillion in interest costs. The problem is for some borrowers, there is too much debt for their available revenue. The Federal government, for instance, has $20 trillion in debt. Where does it find the tax revenue to service a 2% increase, or $400 billion in interest costs? The answer is, they do what they do now i.e. borrow to pay interest until they can’t anymore.

When normalized economic growth moves us towards normalized interest rates, we find that our huge debts have put us in a box. It comes down to this. The size of the debt relative to the economy has never been so large, ever. So, when interest costs rise, the cost of servicing debt rises faster than many entities can handle. It is a debt trap, or box.

Our very large outstanding debts create an apparent dead end. The economy’s return to a normalized growth will bring higher interest rates, and higher rates combined with record debt levels will, in turn, be a restraint on the economy. The future seems hampered by the amount of debt we took on since 2008, and before that 2001. Pensions and retirees may be winners, but debtors like governments and overly indebted households and businesses will have trouble paying future interest costs.

Summer Vacation 2016 Investment Asset-Class Rethink: A 3-Part Series

beach investor

US stocks are at new Highs and Record Valuations

Are You Bullish, Bearish or Confused?

The media is reporting that the stock market is trading at just 17 times next year’s estimated earnings. Many in the stock-buying business will tell you stocks are a “good” buy. Here are their reasons:

  • Interest rates are near 0% which means there is no alternative to stocks.
  • The dividend yield of the S&P 500 is about 2%.
  • The stock market always goes up over time.

Yes, but…….

  • There is Always a Business Cycle, and We Are Near the End of One Now


  • History Shows Buying Stocks at these Valuations Project Low Returns and High Riskcondensed shiller
  • Interest Rates Are At Record Lows – But Why?tenyear

Interest rates are at their lowest point ever. Stock dividends appear to be a strong competitive value. Consider, however, the reason interest rates are at record lows. It isn’t good. Central banks everywhere are forcing rates down to prevent a global depression.

The average stock is at its highest valuation EVER which doesn’t match up with the fact that S&P 500 earnings haven’t increased since 2012!

Stagnant earnings and expensive valuations with the backdrop of the risk of a global depression, seem like good reasons to be cautious about putting money to work i.e. not rushing to buy.

We think investors should explore the disconnect. After 4 years of stagnant earnings, why do stock prices continue to climb higher and higher?

  • Are Dividend Stocks Basically Safe?

One big investment theme this year is dividend stocks. Many stocks are yielding around twice the interest rate of the 10-Year Treasury Bond, which is a good argument to own them. But the valuations of these stocks are now really expensive. Are ultra-low rates an opportunity for these stocks, or an indication of the risk of a financial depression? That is the question. Don’t be deceived that dividend paying stocks are “safe”. In 2008, dividend paying stocks were down nearly the same as the S&P 500, that is to say, negative 50% at one point.

Buying expensive stocks, dividend payers or not, becomes hazardous to your wealth at some point. From our perspective, the current environment of unresolved global risks, very high equity valuations and growing pressure on profit margins, means cash has a very strong chance of being a better asset. Not only will cash hold its value in a correction but having liquidity available to buy at lower prices is an underrated way to actually make money!

In our next installment of “The Summer Vacation Investment Asset-Class Rethink”, we take a look at the most widely owned financial asset of all, the bond market.

Peter Quigley

Renvyle Partners LLC


Bitcoin: What is it? Why do people want to own it?

by Peter W. Quigley, Renvyle Partners LLC



Novel, ground-breaking, the first digital currency, are all apt descriptions of Bitcoin. But is it really money as so many millions who already own it and transact in it believe? If so, why exactly, and why is it valuable?

In the fall of 2008, an unknown entity calling himself, or themselves, Satoshi Nakamoto released the concept and technological framework for Bitcoin. By January 2009, it was up and running. Besides introducing the radical financial innovation of a stateless digital currency, Bitcoin was also the launching pad for a new security technology called the blockchain.

The blockchain is the software innovation of coding that makes Bitcoin possible. The blockchain is not just an encryption that keeps Bitcoin safe, it is also an accounting system that keeps an up to date ledger of each owner’s Bitcoin and transactions globally. In fact, this ledger is updated across the network every 10 minutes! It is pretty amazing.

The blockchain’s secure coding protects Bitcoin owners; but where are Bitcoin stored and can they be stolen? Bitcoin exchanges are the “banks” where users buy, sell and store Bitcoin. The protection of Bitcoin owners became an issue in 2013 when a major robbery took place. Mt. Gox, a prominent Bitcoin exchange was hacked and the Bitcoin taken. What prevents that from happening again?

A host of Bitcoin exchanges say they have added more network and account security. Some offer account insurance. In addition, the gangs of hackers itching to steal Bitcoin face the entire universe of Bitcoin users, many of whom are very tech-savvy themselves. Since the Mt. Gox scandal, Bitcoin investors have, to a great extent, repaired their confidence in the security of the currency, but a healthy sense of vigilance remains.

Blockchain’s encryption and ledgering has impressed the global finance and payments industry and it is investing heavily in the technology for its own use. But has the global financial system adopted Bitcoin itself? On the margins, the answer is definitely yes. Since 2009, having survived growing pains like Mt. Gox, Bitcoin’s credibility is strengthening. Both the user base and vendors accepting it as cash are growing. The value of outstanding Bitcoin is now $7 billion, and the idea that it is in fact real and here to stay is gaining traction.

What is Money?

Bitcoin has provoked important conversations. Because it isn’t backed by an asset or a government, how can it have any value and be considered a credible currency? Transacted over the internet, how can it be taxed? Hasn’t the internet’s global presence made Bitcoin inevitable? Is it really money?

Bitcoin’s advocates make good points. All money requires the belief that it is a store of value that can be exchanged readily with others. Even the most enduring money of all, gold, though it is indestructible, rare and expensive to produce, is only worth what people believe it is worth.

National currencies are confidently used for transactions in every land, but all currencies in the world are depreciating and printed on useless paper issued by governments who print more and more of it all the time. Despite these shortcomings, paper currency is used all the time and even used as a store of value. Despite constant depreciation, paper money’s credibility is seldom questioned.

Bitcoin advocates argue that the nature of money can be better understood in the purpose it serves. Money, they say, is essentially a way of keeping a ledger of payments and debts and as such has been essential to trade since before recorded history. For untold centuries, wampum, feathers and shaped stones served as money in North America. In the 1800’s there were dozens of currencies used in the US that had been issued by local authorities and private companies. Backed by very little that was tangible, these forms of money still served as currency.

Bitcoin advocates say Native American wampum and 19th century local currencies were useful in their time and in today’s digital networked global economy, Bitcoin is extremely useful and will become even more so. Bitcoin is perhaps even more credible than other currencies of the past and present if for no other reason than it is immutable, durable and since the quantity is limited a better store of value.

Bitcoin’s Unique Usefulness as Currency

Bitcoin’s is unique because it only exists on an information network. It has the unprecedented advantages of being accessible anywhere at anytime and existing outside of the banking system. How many currencies can say they are so useful in these ways?

Transacting instantly outside of the banking system, Bitcoin has proven uniquely useful to the Chinese who have been moving money out of China and out of the Yuan, for example. It has long been recognized that Bitcoin is useful for illicit money movements. It is becoming increasingly useful in daily trade and commerce by travelers and in cross border trade where it is possible no currency translation is needed.

Among the thousands of firms accepting Bitcoin payments are Microsoft, Dell and Expedia. This is a long way from Visa’s market share, but the use of Bitcoin can conceivably grow exponentially when companies and people decide they are comfortable holding quantities of money in Bitcoin rather than converting it to paper currency.

Whether Bitcoin even has a right to be money may in the end just come down to the point that in a networked world, isn’t a currency like Bitcoin not only very useful but also simply inevitable?

Bitcoin Looks Increasingly Attractive as a Store of Value

Holding cash outside of the banking system is increasingly sensible. In many countries, today negative interest rates on deposits and bonds exist in Japan and much of Europe. This means you pay to keep money in the bank or to own a government bond. Negative interest rates are a good reason to move some Yen, Euros or Krona into a Bitcoin exchange.

Some investors have learned the hard way that holding money outside of the banking system is a good idea when banks go broke. In 2013, Cyprus went broke and its banks were closed. When the banks were reopened, funds on deposit in excess of the insured 100,000 Euro maximum were largely confiscated by the European financial authorities. Holding money outside of banks is sometimes a good idea. Banking rules are being changed even in the US to permit the takeover of deposits like in Cyprus. If Bitcoin has arrived as money, investors will use it to avoid growing banking system risks.

Bitcoin’s quantity, like gold is limited, as both are increasingly difficult to produce. The rate of new Bitcoin “mining” has already slowed and in 2040, the number in existence will go from today’s 15 million to the end point of 21 million. The contrast between Bitcoin and its finite quantity in an era of unprecedented levels of paper money printing is stark.

Paper money makes a poor store of value. If in 1966, a child put a US dollar they had received for a birthday gift in a secure place in an effort to save the money, what would it buy today? In 1966, it would have bought 20 first class stamps; today a tad over two. It would have bought over 3 gallons of gasoline; today about 1 ½ quarts. That’s how money printing works and paper money fails as a means of storing value.

The number of Bitcoin will stop increasing in 2040 at 21 million. How can there be enough of them for it to be money? Rather than being divisible into 100 cents, Bitcoin is divisible by one million parts. So there will be 21 million, million Bitcoin cents. If Bitcoin becomes accepted by a billion people, its finite quantity will make it quite valuable while the value of paper currencies will be largely governed by the huge increase in their quantity in circulation. Bitcoin sitting in a digital “wallet” has a better chance of maintaining value than paper money over time.

Bitcoin is easy to use. It is really easy to transfer money back and forth from a checking account to a Bitcoin exchange. People do not yet realize how easy it is to transact Bitcoin.

Bitcoin is controversial and ground breaking. It introduces the concept of digital supra-national money. Governments are challenged by it. Yet the number of businesses globally accepting it as payment is growing and skepticism about it seems to be declining. The usefulness of Bitcoin is becoming ever more apparent to its users, including those who want to hold money outside of the banking system or national currencies.

Bitcoin’s Future is Not Assured

The future is not all glorious sunshine for Bitcoin, however. Its future is very much dependent on preventing another Mt Gox theft. People are more confident in the security of their accounts now but the Bitcoin exchange industry and user base have to remain vigilant. Increasing and protecting user confidence is critical if Bitcoin is to expand.

There are also the undefined risks of another digital currency superseding it or a government declaring “war” on it. Bitcoin is not without risks but if you think the US Dollar is risk free consider these facts. Since 2008 the national debt has almost doubled, or recall the loss of buying power we have seen over the last 50 years. Those are risks that have materialized and are operative today. All currencies have risks.

Frankly, many Bitcoin boosters believe it is going to increase a great deal in value. So far, the value of Bitcoin has been very volatile. It rocketed up to over $1,000 in 2013 and then crashed to the low $200’s last year. A two year bear market is over and it is around $450 at this time (May 15, 2016).

Coindesk chart from snippet tool (1)

Bitcoin’s growing adoption globally as well as the need for a digital currency outside of the banking system, points to an increase in its use and demand. Its proponents see a big future for Bitcoin as the world’s digital alternative to paper money and even gold. If the risk of digital theft is contained, maybe this vision will be realized.


Replacing China’s Lost Demand is Everything to the Global Economy Now

ghost town

Since 2008, China’s boom was fueled by $20 trillion in borrowing and in turn fueled the world’s recovery. Today, China’s bust means a dramatic decline in demand for exports to China. If  China doesn’t come back on line, where is that demand going to come from?

At the port of Long Beach, a near record percentage of containers go back to China empty these days. Commodity exporters, most notably Brazil, have seen a decline in excess of 35% exports to Asia, both Europe’s export engine, Germany, and the US’s export of finished goods and consulting fee income to China in 2015 are down significantly, weighing on industrial companies.


This is what is ailing Brazil’s Economy

It is now apparent China’s building boom was financed with $trillions of debt that created an unprecedented demand for iron ore, coal, oil, lumber and grains. Commodity producing countries like Brazil, Canada, Australia and Russia boomed as a result. Since 2014 however, things have cooled in China and has resulted in a bust in commodity producing countries.

Only now has it become widely appreciated how dependent on leverage China’s rapid growth was. In only six years, the Chinese increased their total outstanding debt by about 400%.  That is how China’s ghost cities were paid for. But how will the ghost cities repay their debt? That is something the Chinese never discuss and is at the root of the uncertainty about China’s return to growth.

chert 22 china growth

China’s Debt Grew Faster Than Its Economy

One example of how problematic the bad investment in ghost cities was in the way they were financed. Emerging middle aged, middle class investors valued apartments as rock solid investments that they believed would provide above average returns. Developers sold these projects with income return projections that were very nice. Chinese demand for speculative real estate investments lead to over building and $trillions in suspect debt. It has been estimated that nearly 65 million Chinese apartments are currently empty. Today, small investors are stuck holding grimly on to their money losing empty apartments. They have to continue to simply pay the mortgages hoping for a turn around or that their son will use the apartment as proof of means to woo a wife. The consumption and investment capacity of these middle class investors is now heavily constrained by the burden of supporting their mistake.

For countries like Brazil, Venezuela and South Africa where debt, horrid politics and the crash in the profitability of their exports are all converging, the deepening recessions are increasingly leading them towards default on perhaps $trillions in debt and much of it is priced in ever more expensive dollars. The loss of a Chinese scale demand is the fulcrum of the growing crises in many emerging and developed exporting economies.

China’s boom was also a primary fuel for the US recovery that started over six years ago. The economy’s leading growth industries were meeting rising Chinese demand. As a result investment in manufacturing and energy, created 30% of the good jobs during the recovery. Both industries were the biggest beneficiaries of China’s burgeoning demand and now are seeing the most damage from the Chinese bust.

2016 is the year that global economic activity and demand must restart or a credit bust will begin to spread across commodity dependent emerging market economies. Where and how growth returns is not at all certain at this time, but given China’s huge debts and malinvestments in properties, it doesn’t seem likely they will lead the next upturn.

There are candidates to help lead a growth cycle and they are also in Asia. Let’s see if Indonesia, Malaysia and India can help turn this around.


Related Article:

China’s “Ghost Capitol Building” Has Been Overrun By Vagrant Food Vendors: by Tyler Durden


China Surprises with a Devaluation of Its Currency

What it means. How It Affects Your Money.


China’s Devaluation Signals Important Trend

On August 17th, China announced a downward revaluation of the Yuan. The world seems very  concerned. While the US economy is doing about the same as it has been the last few years, the reality is the global economy is under a lot of pressure. Currencies are falling, recessions are breaking out and US export industries are already suffering.

Now China, which is number two in the world,  has taken the surprise measure of devaluation which can only mean they are under pressure too.


Currency War Fears Over Yuan Devaluation: Reuters. How other countries are effected.

Surprisingly, China isn’t the cheapest place to make things anymore. In fact, right now labor in Mexico and a host of other countries  is cheaper than in China. Slowing economies and rising competition have caused China’s exports to decline 8% since last year. One remedy is to devalue their currency like so many other have.

How does a devaluation help their economy grow? If a Chinese worker is paid 10 yuan/hour that is $6.20. If the yuan should fall 10% against the dollar, that 10 yuan/hour worker now costs $5.58/hour lowering the cost of their products. By devaluing, the Chinese hope to sell for lower prices and beat out Vietnam and Mexico for export business.

China’s devaluation was a surprise,  but devaluations are common these days. Why in just the last year, both the Japanese yen and the Euro have devalued at least 15% vs. the dollar. But that’s not all. Many emerging countries’ currencies are at or near record lows and falling.

The world is worried that China will buy less and try to sell more. China is the second largest economy in the world now and its impact is very large. It is said that in the last 15 years China used more concrete than the United States did in the 20th century. It has been China’s huge demand for commodities and goods since the financial crisis that has had the most positive affect on the world economy. That is reversing.

Recent competition from  emerging countries with lower wages than China and the resultant drop in exports has forced it to devalue the Yuan. In turn others will be forced to devalue even more. Within hours of China’s announcement, Vietnam allowed their currency to devalue for the third time this year. If currencies are in competition to chase each other down, you may ask down to where? Well that is a good question.

The Good and Bad for the US

For Americans, in the near term at least, devaluations mean prices for imported goods and commodities will fall and a dollar will go further.  Now that China has joined the currency devaluation club, we may even see negative inflation for a time. Remember, exporting countries are competing for the same business. They may continue to devalue further and further to win business.

The stuff we buy at Target may get a little cheaper. This sounds great but there are two downsides. China and most everyone else isn’t going to be buying as much equipment, food or Harleys from us going forward. Our products are getting more expensive for them. Some people here will lose their jobs because of fewer exports.

International trade is going to pressure wages in the US as most of the world’s currencies are devaluing against the dollar and as a result their wages are falling in terms of dollars. In fact, increasingly this process is pressuring wages and business everywhere from Europe to Asia to Latin America, from Spain to Singapore.

Falling Currencies Have Triggered Defaults and Financial Crises Before


The devaluations are increasing the risk of a debt crisis . Many commodity producing emerging economies, such as Brazil, Venezuela and South Africa, are falling into recessions and deficits and are particularly vulnerable. Commodities are at 15 year lows.  Brazil, a very large country, is particularly concerning. It has borrowed $billions to host the World Cup last year and the coming Summer Olympics. It isn’t being discussed in the media but this huge country’s reliance on commodity exports is killing them now.  They have both huge debts to pay in a back drop of huge economic and political problems.

Global Borrowings in Dollars is a Risk Now

Which brings up an important issue.  Emerging countries have accumulated record debts over the past 10 years and much of this has been borrowed in dollars, not their own currency. Devaluations mean  paying these debts is becoming more difficult.

Emerging economy recessions often do create crises. In 1997, Thailand’s currency crashed and subsequently a debt crisis broke out across Asia. Twelve months later, the crisis found its way to the US and the Federal Reserve had to intervene as a huge fund defaulted in New York threatening the entire financial system.

This time emerging market countries have about three times more debt than in 1997 and the majority of it is due in dollars. Having to repay debt in dollars isn’t a good thing right now. Remember many countries’ currencies are at or are nearing record lows. That means it takes more and more Thai Baht, Brazilian Reals or South African Rand to buy a dollar. The value of those countries debts is increasing as the dollar increases. Unfortunately, this is happening as their economies fall into recessions.

The Global Economy Seems More and More Important

The pressure globally on currencies, prices, wages and foreign economies does and will affect us in some good ways but potentially very bad ways as well. China is the world’s second largest economy and their announcement that they too want to devalue their currency shows they are worried about their own economy more than was expected. Most importantly, it accelerates the competition to devalue which in turn makes debts borrowed in dollars harder to repay.

We are one global super interconnected financial system now and how low is low enough for many currencies is yet to be seen and the consequences considered.

Wealth Building Secrets of Middle Class Millionaires: A Financial Analysis

Can This Family Really Afford This Lifestyle?

Luxury in Driveway

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. The attractiveness of their homes and the cachet of the autos in their driveway may not be an accurate representation of their wealth. In fact, middle class neighborhoods very often consist of families that are multi-millionaires, while others are carrying a lot of debt and have little equity. Surprisingly, you may not be able to tell which is which from the outside.

Unexpectedly, middle class millionaires are often not super high earners. They can be public employees, Main Street business owners and technicians. Outward appearances are misleading. Financial decisions often determine financial success more than huge earnings. Saving and investment are critical to middle class wealth accumulation.

John and Joan Anderson are in their mid 50’s and have a modest income of $125,000 a year. She is a teacher and he is a contractor. They are careful with their money and despite appearances, they are self-made millionaires.

The Andersons drive late model but paid for vehicles. Their home is nicely kept and typical for their neighborhood. John is a contractor so the upkeep and upgrades on their home were done without loans or great expense. They don’t hire lawn services or pet sitters. They avoid extra expenses like storage units, security services and house cleaners. They live well but without frills.

The couple saves money in many ways large and small. Her health benefits from the school help their budget a lot because John is self-employed and health care costs are very high for small businesses. John and Joan are masters at do-it-yourself and save a lot on home maintenance. Monthly bills add up so they have cut out the extras in their monthly outlays for cable and cell phones down to what they need. Their utility bills are reasonable; they have insulated their house well and use a programmable thermostat.

Consistent and sensible investors, the Andersons have three apartments from which they plow the rent back in to pay off the properties. With the kids done with school, they now invest about $25,000 a year in their retirement plans. The value of his SEP and her 401k is already over $430,000 and the equity in their investment properties is $300,000. The equity in their home is $250,000. They have almost $1 million of equity in just these three categories. They are modest people but they are already worth a $million.

10 years from now they will be able to retire with multiple sources of income. Her pension and their social security benefits should payout about $85,000 a year. Income from their properties will net them about $25,000 a year. Finally, income from their IRA’s should comfortably provide them with $40,000 a year. Yes, that is more income than they have now. But they are happy living on much less than all that.

Conspicuous consumption has the appearance of success. Ironically, in the middle class it very often undermines success. The luxury SUV in one driveway may announce success, but if it is leased, this status symbol is an expensive monthly liability. Buying new cars and holding on to them for 10 years or more, easily saves a family with two cars $6,000 a year over leasing. The choice is starker still when you take into account how they need to earn about $10,000 before taxes to carry that extra leasing expense. Most of that could have been deposited into a retirement plan.

The question is; does the family with high status cars really have the huge income required to spend many thousands a year leasing luxury vehicles and still build equity in their investments and home? It’s too bad but the irony is so often the people, who live most like millionaires, are less likely to become one than others in the same neighborhood who spend carefully and invest steadily.

Can you think who might be the middle class millionaires in your neighborhood?

Social Security: Waiting Until Later is Like Getting a Second Pension


Susan Kasik is an office manager and will be 62 soon. She is considering retiring. Susan is healthy and ok with her job, but she just wonders if she can move on now to a life of days doing whatever she likes and nice vacations.

But Susan will probably live a really long time. Her statistical life expectancy is 85 years. Half of women her age will live longer. Being healthy and relatively affluent, Susan is particularly likely to exceed the average. Does she have the financial resources to live 30 more years in retirement?

At 62 Susan can begin to take Social Security but should she wait? She has an IRA that is over $500,000 and no mortgage, but Social Security will be an important part of her income and financial security. Lets look at how much more Susan gets if she waits to retire at age 70 when she can get the maximum benefit.


Waiting to 70 Pays an Additional Benefit: It is like Having an Extra Pension

The extra $1,132 a month Susan will get amounts to $13,584 a year. She would need another IRA account with $250,000 in it to get that kind of income if she doesn’t wait. The Best part; this is a real diversification from stocks and bonds that she doesn’t have to manage or do anything sbout.

*Illistration is Hypothetical. After age 80, Susan will have received more in total benefits by waiting until 70. By the age of 95, she will have received $196,222 more than if she had begun to draw at age 62.

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.

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.