That time may not be now.
For a very long time the natural course of action for the most financially conservative of us has been to invest our money for retirement into very safe ten year treasury bonds or to be even more safe with thirty year treasury bonds, but with the dismal 10 year treasury rate and 30 year treasury rate it truly is time for a change.
I would argue that at this point investing in these safe methods is not much better than putting your money under your mattress other than the fact that you won’t have access to it, so that it takes the concept of willpower out of the equation. If when you retire you’re going to want to maintain a good standard of living and be able to enjoy your later years, then you’re going to want an investment strategy that suits the current times.
Of course you don’t want to be risky with your retirement money because living comfortably is better than making out like a bandit. The 10 year treasury yield is now at record lows under 2% if you can believe it. In the era of perpetually low interest rates you’re going to have to seek other options for a stable, but prominent retirement lifestyle.
Why is this happening?
You can thank the abysmal state of the government of the day and the monetary policies that have been followed for many decades now. This situation requires an understanding of both how inflation works at its core and what naturally causes interest rates to increase and decrease.
When it comes to inflation many folks believe it is a naturally occurring phenomenon because it has been going on for so long and while controlled inflation can be just fine for the economy perpetually devaluing the currency by use of the Federal Reserve has been eating away at the savings of all Americans. This is a tax that many people don’t realize is even being levied against them.
The biggest investors in the bond market have been spending the past two years or more flooding into the market which is obviously driving rates to all time lows. This is why there is no good reason for you to stay involved here. Essentially these major investors know that the bond rate increases as the yield decreases and they’re going to profit off of that, but if you want to get into the bond market for the yield you’re going to be stuck with abysmally low rates.
So why are rates so low then?
In a free market the interest rate is a balancing act. As people accumulate extra money they begin to save it, banks then take that money and lend it out to make a profit and the original saving client makes interest off their savings. Naturally as the amount of deposits in banks increase the rate at which those banks are willing to lend money will decrease dragging interest rates low. So interest rates should be low when savings are high, but savings accounts have been offering AWFUL rates for years, so what gives?
The inverse of a situation where savings are high, so interest rates are low should be that when savings are low, interest rates rise and in turn people are able to make more money and have a major incentive to save more, which resets the cycle.
With a central bank like the Federal Reserve controlling interest rates they’re throwing a wedge into the system. In their infinite run to the bottom the Federal Reserve has decreased rates for so long that there is nowhere left to go. With interest rates being forced down naturally people have stopped saving as much and instead are utilizing how cheap credit is to consume in massive amounts, yet we’re not seeing much real economic growth.
If the Keynesian theory is that consumption is what drives the economy then shouldn’t the economy be on fire? The truth is that savings and investment in efficiency in the economy drives growth, yes the creation of goods and services is what really drives economic progress.
The fact is that household debt is at record levels and now the Fed does not want to increase rates and destroy the economy in turn, the know that when rates go up there is going to be a shock associated with it that will be unavoidable. This means they are going to kick the can down the road as long as they can and you’re going to be stuck with low rates for a long time.
This situation has been sugar-coated or misunderstood in the media for years and while it is economically wise to consume today with these low rates now, in the future when it comes time to pay the piper so many people are going to be left with huge debt and interest rates that will break their backs. So at this point my advice would be to clean up any debt that you have an invest in smart, but a little more riskier solutions to get the returns that you need for a good retirement.
The scary thing is that even if private individuals in the economy such as yourself eliminate their debt so that you’re secure, the government cannot afford to have the interest rate increase. As I write this article the United States government is $18.4 trillion in debt with unfunded liabilities approaching $150 trillion. If interest rates were to rise even 1% the US government’s debt repayment service would increase by about $200 billion or over 70% of what it is now. Debt service is already 6% of the budget and America would have to make massive cuts to sustain this level of debt growth.
If interest rates go up and there is no a drastic change in our economic situation the empire will crumble.
So how do you succeed?
The answer is to have assets in your portfolio. If paper money is constantly being devalued then buying assets is the way to go. Choosing conservative Real Estate Investment Trusts (REIT) is a great option here. Now there are riskier choices and more conservative choices, you really have to do your homework, but investing in a REIT will allow someone who doesn’t have the cash to simply buy up property on the spot to be able to benefit from housing prices.
If you want to be even more conservative then you could invest in gold and silver, which is a traditional hedge against an unstable economy.
At the end of the day you really have to decide what you believe will happen. Do you believe the Keynesian economists when they say that unlimited Quantitative Easing will keep us going forever or do you take an approach like mine where you believe the House of Cards is going to collapse soon. If you agree with me, then don’t get caught without investing in a hedge against the collapse of the dollar.
To your everlasting wealth!