Retirement income and expenses are surprisingly dependent upon the global economy. Interest rates affect the amount of income received in some cases and they can affect the cost of borrowing as well. Low interest rates reduce income while making other income options, like a reverse mortgage, more affordable.
For several years, the Federal Reserve has been cutting interest rates in the U.S. Central banks around the world have been doing the same and in early July, three of the largest central banks in the world took actions to keep rates low and boost economic growth.
Why cutting interest rates is important for the global economy
The European Central Bank cut its key interest rate by a quarter percentage point and short-term rates in the Eurozone are now at a record low of 0.75 percent. The ECB also cut several other interest rates in an effort to encourage banks to make loans and invest their money in the economy rather than keep it on deposit with the ECB.
Central bankers in China also cut short-term interest rates and the Bank of England added to its quantitative easing program, an effort intended to lower interest rates in these unprecedented times of low rates. Analysts were unsure about the impact all these actions would have.
News reports noted that some economists believe the cuts may have only a symbolic effect because rates are already near record low levels. Despite the current low rates, lending activity has been weak at least in part because there is little demand for new loans from businesses.
Rate cuts and quantitative easing programs are used by policy makers to stimulate economic activity. The fact that three central banks chose to take action in early July, weeks after the Federal Reserve took additional easing actions at its June meeting, indicates that monetary authorities around the world are concerned about a slowdown.
These actions now indicate they expect the slowdown to continue. If they were optimistic, they would act to end easy money policies or at least do nothing. The concerted efforts show a slowdown through at least the end of the year is likely.
This means retirees are likely to continue to see low returns on their investments. The good news is that they are also likely to continue enjoying low rates on products like reverse mortgages.
A reverse mortgage could be used to convert a home into monthly income. That could make financial sense in this slow-growing economy, and offer financial security to retirees who have been battered by investment losses over the past ten years.