It is common knowledge that we are in a historically low interest rate environment. Loan rates are low and savings rates are virtually non existent. Certificates of deposit are currently yielding .55% at your local bank. Regardless of the rates, everyone is hard pressed in this macro environment to find constructive ways to earn income off their savings.
If you are still working you can focus on earned income but if you are planning on retiring or already retired you may feel forced to make decisions that entail disproportionate levels of risk to your savings.
Most people age 62 and above will have Social Security available along with maybe a pension of some kind and whatever they can earn on their savings as a supplement. It used to be a given you could earn 4.0% or so on your savings and that really made the difference but now you cannot expect to earn anything on your savings unless you are tempted to reach for yield.
Reaching for yield entails risk. In order to obtain a higher level of return on your savings you will have you to buy dividend paying stocks, bonds, bond funds, junk bond exchange traded funds, or high yielding real estate investment trusts etc. All of these items will increase your yield but they also come with associated levels of volatility and potential loss of principle. These investment options are not relative comparisons for your local bank certificate of deposits as we all have known them.
If you are planning for retirement or are already retired, the first question you should ask yourself is, “can I afford to lose any principle?”. This has become a real issue. I have investments in all of these areas and I have done well in them over the past three years but they are volatile. I still work so I have wages to buffer me from this volatility. More importantly, if I were to lose principle my wages would be there to fill the void. Those of you focusing on retirement would face a significantly different dilemma with the loss of principle and you should be aware of this risk.
The risk of loss of principle affects everyone as they reach for yield in this current environment. A good friend of mine got caught up in the Auction Rate Security Certificates crisis in 2008 and ended up only getting 97% of his money back. Everybody used to say those instruments were safe and they certainly paid a higher yield than comparable alternatives but at the end of the day there is no free ride. For each additional increment of investment return, we have to acknowledge that there is additional risk. If something sounds too good to be true it usually is.
Now I am not a licensed investment advisor, so I cannot recommend investments but I have been an independent investor since 1985 so I can attest to the real risk with the reach for yield. My personal thought process is that diversification is the only free ride when it comes to investing your savings and considering retirement. This means not having all your eggs in one basket regarding your savings and also diversifying your income streams as well.
Where is the Antidote? This is the real question. Social Security is an excellent starting point to building a foundation to retirement. It is available as early as age 62 but the longer you wait, the more money you receive in a monthly annuity. If you can manage to wait until age 70 before drawling on your Social Security, this may well be in your best interest. Pensions, savings, and retirement accounts round out the other residual sources of income for retirement. Pensions are terrific if you have one but many people do not or they may have taken their pension in a lump sum for fear of future cutback, again related to the low interest rate environment and the difficulty their pension fund is facing managing the money. We already touched on savings so let’s look at retirement accounts. When we pull money out of our retirement accounts this is a taxable event. This also takes away the leverage we have to allow our retirement nest egg to grow tax deferred. The Antidote that should be considered as a compliment to your retirement plan is a Federally Insured HECM Reverse Mortgage.
A HECM Reverse Mortgage stands for Home Equity Conversion Mortgage. This is safe annuity source for tax free income to supplement anyone planning to retire or currently in retirement. If you can plan to draw Social Security later rather than earlier and also hold off on drawing on retirement accounts, a Reverse Mortgage may very well be just the Antidote you are looking for as a replacement for income on your savings.
Reverse Mortgages do have rules and they are only available for those 62 and older with equity in their homes but they do not have the volatility and loss of principle risk you may face with the reach for yield. I have several pages of information on HECM Reverse Mortgages for you to investigate on my site at Jefferson Mortgage Group LLC www.jeffersonmortgage.com
Before you reach for yield or possibly make a decision to supplement your income that entails risk, I would only ask you to review your options with a Reverse first so you can be fully informed. I am always available to discuss Reverse Mortgage options with you.
Blogging from the front line.
George Omilan
NMLS# 873983