Aug
Low Interest Rates Might Last Another 20 Years
Written by Leo FranklinSome very well-regarded economists recently published research based on over 200 years worth of data that concluded low interest rates are most likely here for the next two decades. The research looked at what happened after government debt soars to unsustainable levels. Their definition of unsustainable is when the total government debt exceeds 90 percent of the country’s Gross Domestic Product (GDP), which is a common measure of the economy.
On average, too much debt leads to slow economic growth and low interest rates for an average of 23 years after the level of government debt grows beyond 90 percent of GDP.
The United States breached that level in 2010. That puts us on track for low rates until 2033, and anyone retiring today will be severely impacted if this proves to be the case in the U.S. Anyone preparing for retirement will also be impacted. In short, retirement planning has changed and you need to be aware of that.
How the report’s findings were derived
Rates below 2 percent on long-term government debt are actually common in high-debt countries. The economists believe that is consistent with standard economic theories. Growth slows when the government dedicates a large amount of revenue to debt management instead of investment.
The governments also need to raise revenue to support debt payments and that leads to higher taxes. In turn, that prevent the private sector from investing and growing the economy. With so little growth, low interest rates are the fair value the market pays to use money. In other words, high debt reduces growth and lower growth leads to lower returns for investors.
The U.S. is on track to follow the historic pattern that has been documented for dozens of nations. Interest rates will move up when economic growth expands, but neither of those is likely in the next few years.
For millions of Americans that are already retired or planning to retire in a low interest rate world, the reality is that their interest income will be below the planning levels used to build a secure retirement.
This makes it important to use all available assets in retirement planning. A reverse mortgage creates income from your home, and could be the key to financial security in a low rate world.
Interestingly, these loans also benefit from the very same low interest rates that are the subject of the report, since that reduces the cost of borrowing.
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