Sunday, September 9, 2012

Save For Retirement If You Can

From the zero hedge website this look at savings rates and interest rates. The mainstream press will tell viewers, readers and listeners that low interest rates are good for the citizens they are pleased to call "consumers." The idea is that low interest rates save a few hundred dollars on purchases of items expensive enough to defy the cash reserves of the shoppers corporations want to suck into a life of interest payments. The truth is low interest rates are killing the ability of institutional investors to get returns sufficient to fund pension plans. Slightly cheaper car over time in exchange for a dead pension? This reality is starting to make the headlines tentatively and figuring out what can be done (if anything) will be interesting.

Exceptionally low interest rates are bad for banks, insurers, and, more generically, anyone wishing to save money. Of the three, it’s the situation of the savers that is most untenable. In particular, Citi notes in a recent report, those wishing to retire at 65 or thereabouts are in for a nasty surprise when they start to run the numbers.

Citi: US Credit Outlook

Given that real yields are negative for Treasury bonds inside of 20-years, the steady stream of inflows into investment grade bond fund that hold a mixture of government, agency, and high grade corporate securities, will simply fail to return an adequate rate of return commensurate with the current savings rates of most retirement savers. What savers need to do is find higher asset returns or increase their personal savings rate.

And therein lies the crux of the problem facing the central banks.

Ideally, the Fed and ECB want to encourage investors to buy riskier assets and corporates to borrow more with the hope being that wealth effects, corporate risk taking, and Keynes’ animal spirits will revive the economy.

But so far the US has failed to respond to Fed’s treatment plan and the inflows into bond funds continue unabated while corporate net issuance is nonplussed. One presumes investors are wary of returning to an asset class, like equities, that performed so miserably over the last decade amid global growth concerns.

But an unintended consequence to resisting the Fed is that the average retirement saver will need to double their rate of savings in order to be able to retire even five years later than originally planned. If and when that sort of analysis enters into the collective consciousness of the typical American, the economic impact is likely to be grim.

As we’ve seen in the UK, higher savings rates lead to lower consumption, a decline in corporate profits, and recession.

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