Dealing With the Dark Side of Low Interest Rates

The extraordinarily low interest rates in place today are a boon when you’re buying a house, refinancing a mortgage, leasing a car or paying off student debt. If you qualify for a loan, low rates can help you spend less and get more.

But there is a dark side to falling interest rates. While they are helpful for qualified borrowers — and have contributed to tremendous returns for people who have held bonds for many years — they are terrible for savers.

Live on less, dip deeply into savings or take on more risk in the stock market: Those are the nasty choices that many people will probably be facing. The dilemma is most pressing for those planning for retirement or already in it.

“People who have done everything right, and managed to put away some money, didn’t expect this, but they’re in a tough spot,” said William J. Bernstein, an investment adviser and author. “A lot of them will have to consume less in their golden years, unless this turns around.”

The fundamental problem is that with interest rates as low as they have ever been, people with modest nest eggs can’t get much safe income.

Interest on new U.S. government bonds, which paid more than 6 percent 20 years ago, has dropped to laughably low levels: On Thursday, the yield for 10-year notes was less than 0.7 percent annually, and for 30-year bonds, less than 1.3 percent.

That means that if you were to retire today and stash your $1 million nest egg in long-term Treasuries, you could only count on an income stream of less than $13,000 a year, and perhaps even less than that. Treasuries are generally judged as quite safe for return of principal. But at these rates, they don’t generate much to live on.

The situation for savers isn’t likely to improve soon. Interest rates are so low largely because the economy is so weak. That economic frailty has damaged other important sources of investor income as well.

But because of low interest rates, the payout on commercial annuities has dropped by more than 50 percent over the last 30 years. In New York, where I live, a 65-year-old man would receive only $494 a month, or $5,928 a year, in return for a $100,000 payment, according to, an independent site that tracks these rates.

You might think that interest rates are already so low that they must start rising, so thebest strategy is to wait before making decisions about bonds, stocks, annuities or other assets. That’s logical, but you may have to wait a long time.

Consider that the futures markets have been predicting the Federal Reserve will take short-term rates even lowerin fact, below zero. Rates below zero are known as negative interest rates; you would have to pay someone interest for the privilege of lending them money. That has not happened in the United States but it is already the case for many bonds in Germany and Japan, and it is a sign of severe economic distress.

In short, even if interest rates don’t turn negative, they are likely to remain low for some time, miring many investors in a quandary.

If rates turned negative, that would mean immediate profits for those who already own bonds and bond funds, but purchasers of those securities would lose income, not collect it. Eventually, rates can be expected to rise, but buying bonds or bond funds before that happens would imply losses down the road.

But for those who can’t afford that luxury, a world of low interest rates means problems galore.

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