Jan
Retirement Income Challenges: Low Interest Rates
Written by Leo Franklin
Social Security and pensions may not offer enough income in retirement, and for many recent years, financial planners have used bonds and stocks to meet the growing needs of many retirees. Standard advice has been to put part of your retirement funds into stocks for growth and the rest into bonds for income.
Many investors used a simple formula, such as 100 minus your age, to determine how much should be invested in stocks. For a 60 year old, a 40 percent allocation to stocks was common while an 80 year old would have 20 percent invested in stocks under this rule. In the current interest environment, no matter how much an investor has allocated to bonds, they are unlikely to generate much income.
Interest rates have fallen to record low levels and government bonds are paying less than 2 percent in many cases. Bonds issued by corporation pay more, but the rates available on bonds from the biggest and safest corporations are usually under 5 percent. Investors have increased the amount of risk they will accept to get higher yields and more income. This increases the chance of a loss in their retirement account and is a decision that should be made carefully.
Even though home prices have fallen in many parts of the country, a home is still the largest asset many people have when they reach retirement. With a reverse mortgage, that asset can be used to generate income and investment risks can actually be decreased with a reverse mortgage.
Home owners who are least 62 years old can take advantage of a reverse mortgage to access the value of the equity in their home. Reverse mortgages are insured by the federal government and the borrower can never owe more than the original loan amount and interest.
This means even if home prices fall, senior citizens with a reverse mortgage are protected against further losses in the real estate market. Without having to worry about risk associated with falling home prices and with increased income available from the proceeds of the reverse mortgage, many retirees will be able to better stick to their financial plans and maximize the benefits of their retirement accounts.
Interest rates are likely to stay low throughout 2012. The Federal Reserve has committed to keeping rates low into at least the middle of 2013. Bonds will continue to offer low yields as long as rates remain low. Rather than reaching for higher income by taking on more risk, many retirees would be well served with a reverse mortgage. The money from a reverse mortgage can be used for any purpose and is tax free, and there is even some down side protection in a volatile real estate market.
Photo credit: MarketThoughts.com
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