By Joseph V. Curatolo
Growing up, many of us learned to save for a rainy day and pay off our debts as quickly as possible. As adults, we put money into a savings account or certificates of deposit. We saved for retirement. We sacrificed, by skipping the movies or a concert, so we could make that extra payment on the mortgage.
For many of you who did the right thing and are now counting on that money, I hate to tell you, but you may run out of money in retirement.
The culprit is interest rates, one of the most basic components of our financial system. They influence almost everything in the world of finance. They can make or break you.
Over the last eight years, those basic interest rates punished careful investors. If you depended upon interest earned from savings accounts, CDs or government bonds you’re probably in trouble. If you haven’t realized it by now, you’ll probably work many years past the date you thought you would retire.
How did this happen? From 2008 to 2015 the Federal Reserve kept interest rates near zero, which allowed banks to lend money at record low rates. However, it also caused interest rates on savings accounts, CDs and bonds to range anywhere from 0.1 percent to 2 percent. Instead of letting the markets influence the rates, the Fed artificially held rates down. That caused people’s safety nets to stagnate and in some cases decline. Their money was in a dead zone.
But it’s not only individuals’ accounts. It’s also a major problem for retirement accounts and pensions. Money managers try to grow accounts by generating at least 6 percent to 8 percent interest every year. That takes into account inflation and other economic costs that eat into earnings. So with current interest rates at 1 percent, money managers cannot invest 50 percent of the money in bonds to safely grow an account. They’re pushed toward much riskier investments, which in some cases has been disastrous.
The Teamsters pension fund balance may fall to zero within 10 years if nothing is done. Over that same time period, many state and local government pension plans could also start facing a difficult time trying to pay current retirees and save enough to pay workers retiring in the future. Something will have to give.
No one can properly predict where interest rates are going, but the Fed should begin to do its part to help the “savers.” It artificially held down interest rates for many years. Now it should begin a program of small, incremental rate increases at a faster pace than it has been.
These rate increases may hurt builders and buyers, but they’ve had eight years of rock-bottom rates. It’s time to increase interest rates and give the savers a period of prosperity they’ll need to financially manage their retirement.
Joseph V. Curatolo is founder and president of Georgetown Capital Group in Williamsville.