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Low Interest Rates – The Good, The Bad And The Seniors

The year 2008 was a turning point in the lives of many, mostly for one reason: drastically reduced retirement and investment accounts as a result of an approximate 40% reduction in the stock market. Since that year, we have seen a worldwide economic slowdown effecting people of all walks of life, at every corner of the earth. This has created a challenge for our government (no, I have no political commentary here) and especially Fed Chairman Bernanke, whose job it is to find ways to stimulate the economy and get it back on track.

Let's look at the positive side of things (yes, there really is a positive side!) The main action of Chairman Bernanke has been to create a very low interest rate environment, committing, at the time of this writing to keep it unchanged through 2014 at the very least, if not into 2015. What does this mean to you? In a few words: more discretionary money in your pocket. Let's say you had an average mortgage of 6% pre 2008. As an example, the principle and interest payment on a $250,000, 30 year mortgage at 6% would be $1498. If you were to refinance it now at the same 30 year term at 3.50%, the new payment would be $1122, a monthly savings of $376. While you may be extending your loan out additional years depending on how many years you are into your original mortgage, you would now have an additional $376 a month to use for other payments: utilities, food, and children (yes, you do have to feed them) or anything else you want to. Now, multiply that by millions of people refinancing, and you see how there would be billions every month available for us to either save for our future, or for the most part, recirculate back into the economy.

Consider how it will help small and mid size business- the engine that drives America. If business owners have more availability of money at low interest rates, they now can refinance their loans, invest in their business for the purchase of new equipment and other items necessary for a business to thrive and hopefully expand. This would further stimulate growth, create new jobs, and help to grow the economy. So what's the downside? Our seniors are being forced to decide between three equally uncomfortable choices: reduce their lifestyle, spend down principal, or take on additional risk in search of higher yield for higher income. This my friends, is the side of that's not too pretty...

The market drop in 2008 of approximately 40% caused the net worth of American's to reduce by trillions of dollars, and for most, the dire ramification of reduced principal balances led to the consequence of drastically reduced income. If your income was based on your principal amount, the 40% reduction in principal balanced resulted in a 40% reduction in income, if you were to withdraw your income based on the same formula of principal times x% equals income. The traditional avenues for seniors who are risk averse are those investments that are relatively low in volatility: money market funds, CD's, and Treasury instruments. While principal is never guaranteed, they classify these investments in the "sleep at night" category, willing to take a lower rate of return in exchange for perceived safety. With these investments now paying at an average of 1% or so or less, between inflation, taxation and the need for more income, these seniors find themselves in a struggle for more income versus safety of principal. For the longest time, interest income in conjunction with pension payments and Social Security were the subsidy for income, and those on a fixed income learned to budget their outflows (that which we spend) with their inflows (that which is income). It's a battle between sleeping at night and having enough to make the bills every month: the proverbial rock and a hard place. It is a terrible, non-enviable place for anyone to be in. What's a person to do?

I cannot emphasize to you more how important it is to consult with your trusted professionals: your Certified Financial Planner, your accountant, and perhaps your children just to keep them informed. Speak with those around you and ask their advice, but be sure not to act on the advice of anyone who is not a professional: everybody is entitled to their opinion, but always rely on those who are educated in their field, have a lot of experience and that you trust. There are many avenues to explore: always seek out professional help for guidance.

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