Today’s low interest rates have been a serious blow to those seniors whose livelihood depends on interest from certificates of deposit or from other safe investments such as bond funds and money market funds. For example, most CDs today are paying just 1% interest or less. People who shop carefully may be able to find one that pays 2% but that’s just $2000 a year on a $100,000 investment. And it’s just darn impossible to live on $2000 a year these days.
It would be nice
It would be nice if interest rates on CDs and similar investments would immediately get back to the 5% or so they were paying just a few short years ago. While it’s very unlikely this will occur anytime soon, there are signs that the tide may be turning and that interest rates may soon be increasing.
Positive signs about interest rates
There are three signs that interest rates may be rising. First, mortgage rates are no longer trending completely downward. There were six consecutive weeks during which mortgage rates did not rise. However, they did begin rising around August 1. While one small movement in mortgage rates does not necessarily make for a new trend, every change in trends can be a turning point.
The drought
Here’s a case of where one man’s poison can be another man’s pleasure. There has been a prolonged drought that has devastated farmlands across the US. When crops fail, food prices get higher. This leads to higher inflation. In turn higher inflation usually means better interest rates.
Gas prices
If you filled up your car lately, we don’t have to tell you that gas prices are on their way up. In fact, they jumped by more than 8% in July. This is a critical part of inflation and increasing gas costs have a way of spilling over into the costs of many services and goods. And as noted above, inflation generally means higher interest rates.
A better job market
July’s job creation number wasn’t great but it was better than average for this year. This may mean there is some life in the economy after all, which could be another sign that interest rates will rise.
What to do if interest rates rise
If interest rates continue to show signs of increasing this might be a good time to get out of long-term CDs and into savings accounts to get some flexibility. Or look for CDs that have fairly mild penalties for early withdrawal.
Mortgage and refinance rates are not likely to remain this low forever. If you are in a position where you can make a move related to mortgages, don’t wait. That could be risky.
Asset allocation
Be sure to take a look at how you’re allocating your assets. When interest rates fall, it creates a tailwind for long-term assets such as bonds and stocks. Increasing interest rates have just the opposite effect. So savings accounts might soon produce better returns than stocks and especially bonds, assuming that interest rates rise sharply.
An immediate annuity?
Finally, if you’re looking for a way to get a better return on your investment right now, you might put a portion of your money into an immediate annuity. This kind of annuity is sometimes called a payout or income annuity. It is where you give an insurance company (or investment firm) a lump sum of cash in return for which you get guaranteed monthly payments for as long as you live. In some cases you may get as good a return as 4% on this type of investment.