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Contributor ○

How will the negative interest rate affect the retirees (like me) and current and future annuitants?

This question came to my mind overnight after reading the CREF MM rates in the Juris' thread. I started this thread so that this not lost in the other thread. It seems to me that it will make the retirees poorer in the future. I also understand from a news item in Yahoo Finance two days ago that several companies will cut the dividends also. Retirees depend on the divs also for their income. So, it seems to me that retirees would be affected just like other segments of population.

TCRS seems to have announced 2.3% COLA starting from July 1 (starting with the payment on July 31 or about).

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Frequent Contributor

Re: How will the negative interest rate affect the retirees (like me) and current and future annuita

Nat,

I assume you mean "annuitants" literally--e.g. those who have annuitized some form of investment account.

While negative rates surely will affect something like TIAA Traditional or CREF MM, there are other asset classes (certainly further along the risk spectrum) that may deliver higher returns.

For current retirees, so much depends on whatever margin of safety was put in place long before covid-19. 

Bob

 

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Contributor ○○

Re: How will the negative interest rate affect the retirees (like me) and current and future annuita

Retirees will suffer for low (or zero) cola and dividend cuts. Making things worse, all food prices have gone to the roof, and I am not talking about meat and poultry. Is there any reason for the increase or is just the old 'greed is good' policy?

Soon to retire people, I am in this group, will have to think if they can postpone retirement since any computation done at the beginning of the year is moot now. I think only few will have the luxury of keeping going.   

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Explorer ○○

Re: How will the negative interest rate affect the retirees (like me) and current and future annuita

The effects are already manifesting and have been growing more pernicious ever since the birth of ZIRP Everlasting.  But it can get even worse if the other G-7 principal global currencies continue to lose value and something like THE Euro goes to par the US$.  

So the current fiascos in the public pension funds where earnings on contributions projected to be earned 30 to 20 years ago have not materialized but some how the annuitants and the soon to retire are" RIGHTFULLY guaranteed WHAT THEY HAVE BEEN PROMISED".  Even the parts of earnings on contributions that never were earned ! So you eventually  get to a Puerto Rico scenario.   The longer the fiascos are allowed to persist the more draconian the eventual solutions to something unsustainable will have to be.  

Beyond that un resolved and growing worse fiasco we have failing "GUARANTEES"  that insurance companies can abide by in the issuance of decent terms beyond return of your premiums on Life insurance.  Worsening actuarials for investors that want to convert at least something of their retirement nest egg to a guaranteed Annuity.  Immediate annuities are almost worthless to the buyers after fees and commissions.  They are already NIRP products. In any case with the exception of a defined pension annuity almost all insurance company annuities are payouts that end at death or the death of a spousal beneficiary if there is one.  So going forward you are likely to just be getting back most of your own money, unless you and / or  a named beneficiary substantially out live your peer group and yourself become an actuarial nightmare.   Deferred annuities may still work a little better but the improving income you accumulate until you annuitize will continue to be seeing ever smaller annual gains.  Worst hit are the LT health care policies which are becoming of ever less value as the insurers have to extend the interim wait period before coverage starts and then the schedules for coverage continue to be cut down to providing ever less in payouts for your LT care issues as those costs AND the LT health care insurance premiums continue to rise.  

Met Life and their subsidiary Brighthouse have recently issued subordinated debt preferred securities that have 4.75% AND 6.6% coupons respectively.  How are they going to pay such handsome above fair market rates of interest unless they squeeze their clients and sleaze puff their insurance products ?

So the High SALT states which have the worst of the pension problems have to continue raising taxes even more and then their credit ratings eventually which is always too late, end up on a S&P or Moody's watch list for downgrades.  The recent phenomenon of invalidating Real Estate as collateral for mortgage loans is a grim precursor.  Even the States with the worst muni Bond ratings have still been able to access the muni markets and fairly easily and competitively for "REVENUE" bonds.  Bonds that have parts of the revenue guaranteed to the bond holders to pay P&I.  Even as they are finding GO bonds increasingly hard to sell at prevailing rates for the credit worthy.   But now they can declare their own emergency set of circumstances and make their pension payment obligations senior to the rights of even Revenue bond holders ?  For more than a decade the often well meaning financial wealth managers dumped their clients into bonds sponsored by Puerto Rico as they were double or sometimes even triple tax exempt and paid good rates.  Fully guaranteed by the full faith and credit of The Commonwealth of Puerto Rico.  But the full faith and credit pledge of the States of NJ, Illinois, or an economic giant like RI, and the rest of the usual suspects are all bona fide.   The NJ governor assures that his state's pension woes "are manageable".  So the plans for these profligates are to manage either until a DEM comes to the White House and bails them out or the congress, Fed and US treasury ascertain how much of the further liquidity measures enhancing the NATIONAL debt will be put towards their own profligacy and paid for by taxpayers of states that operate on a little more actuarially sound basis, but do not pay out such generous benefits as the profligates.  If your state is paying out to LESS than 20% of it's annuitants MORE than 50% of the annual gross distributions every thing will work out just fine, especially for those in the group that has the 20% lowest gross annual annuity payouts.  After all they get the same % colas as the people at the top who get three times the gross $ amounts in Colas as least compensated do.  

Who thought Palladium could get to $3K, but it did even if very briefly.  So as other currencies continue to weaken getting back 99% of your money from a bond investment in US dollars can still produce a positive return if YOUR currency declines by more than 1%.  So as this continues to unfold we have seen gold stand up and take notice.  So gold is not a legitimate currency or maybe that is a moot point.  That debate can wait for a time when gold works towards say $2400.   The ever fluctuating ratios for gold and silver but still staying in some channel ?  Except in pirate movies and old westerns when have you ever heard someone say they are searching for buried pieces of eight  or I wouldn't give two bits for ... So then any and all coins of known and recognized mints whether old junk silver pre 1964 US coins or bullion coins like the US silver Eagles start to become more commonplace as they are used for currency.  If an ounce of silver rises to $24 vs gold going to $2400 then a recognized bullion coin bit becomes worth $6 and a piece of eight becomes worth $3.   Coins are actually physically cut up into pieces of trivial pursuit pies.  Each piece or bit still has the mint marks, enough so as to make them easily recognizable as quality bullion.  Ditto cutting into 8 pieces of pie.  

Some scenarios that may come out of ZIRP and ZIRP EVERLASTING morphing into NIRP, may seem outlandish.  But who a year ago would have thought, in this country you would go into three different grocery stores and find no eggs, no milk and no toilet paper.  Even now we are still blessed where we have to social distance and wait in line to buy things vs those in Russia 20 years ago who had to wait in line twice as long to buy the same things of inferior quality. 

The problem with Ballerina palladium coins is trying to find ones of decent enough quality to make them something you can later sell.  Most of them got really beaten up during the period of Glastnost when they were routinely exchanged as common currency.  

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Participant ○

Re: How will the negative interest rate affect the retirees (like me) and current and future annuita

When you say negative rates, do you mean 'real' yields, or negative fed funds rate? I don't think we'll see the latter as Powell says he doesn't think it will help. The former is a problem, but it has been for a very long time. The Fed Funds Rate has gone from 19% in 1981 to 0.1%  this year. The 10 year govt bond from 15% to 0.69%, and the 30 year fixed mortgage from 18% to 3.24%. Inflation was crushed to the point it never returned. Fixed income yields are appalling, and retirees are being pushed further and further out in duration and risk—way beyond where they should be. You need to pay about twice as much now for your required rate of return. You are not being rewarded for credit risk, inflation, and I suspect not even the risk-free rate in some instances. Quite why the Fed isn't surrounded by a sea of angry grey hair (if you're lucky enough to still have any) shaking their fists is a mystery. It's probably the gagging effect of soaring prices. I can hear the government's response: "Get in line, dude! Look what we've done for your 401k. We've got more serious problems to deal with". The downside about retirement is you can't wait in the hope things will improve. You can only lower your expectations and outgoings. Viva la Mexico! Here we come, baby!

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Explorer ○○

Re: How will the negative interest rate affect the retirees (like me) and current and future annuita

Very good and very concise point of view on ZIRP.  But you omit how retirees are FORCED out of safe haven investments and turn to a near necessity of not just over weighting equities but putting as much as 20% of that into TRADING the volatility events so as to produce enough adequate CGs to service their SWR from their retirement savings.  

This is really great because if any of it is non tax sheltered ST CGs the US gov't can gouge you for the tax. In addition the States themselves are finding ever more insidious ways to tax the dividends, interest and capital gains of the retirees.  What can you do when the Ute you bought 10 years ago at $19 for reasonably safe income, gets bought out at $52.  There goes your income on "YOUR"  COST BASIS and here comes the cap gains tax when "the buyer" gives you cash instead of shares.

So if it ends up that the 35 year rally in US fixed income is ending, what is going to happen to you if you invest in bonds or worse Bond Funds?  Bond funds were the same as bonds and just as safe until the 4th quarter of 2018.   There will be plenty of chances to sell on the next bond rallies,  in a time when the national debt gets to 300% of the GDP?  

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Re: How will the negative interest rate affect the retirees (like me) and current and future annuita


@CarlosDS wrote:

Retirees will suffer for low (or zero) cola and dividend cuts. Making things worse, all food prices have gone to the roof, and I am not talking about meat and poultry. Is there any reason for the increase or is just the old 'greed is good' policy?

There have been serious disruption in many operations.  IMO, the demand and supply balance has been affected.  I am not surprised. 

Soon to retire people, I am in this group, will have to think if they can postpone retirement since any computation done at the beginning of the year is moot now. I think only few will have the luxury of keeping going.

A comfortable margin of safety is necessary and wise even in normal times.  We never know what life might bring.  Best wishes to you as you make plans for retirement.  If you have the option of waiting and if your health is good, I'd say take your time until you feel more certain that the right time has arrived to retire.   


 

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Explorer ○○○

Re: How will the negative interest rate affect the retirees (like me) and current and future annuita

The only thing you have to look forward to is a REDUCED standard of living.  Not to mention double digit increases in medical costs, which you, as a retiree will likely be in need of.  You can stand in the free food lines for seniors and receive your montly allotments of canned green beans and peanut butter at the commodities handout.  Look forward to a BLEAK retirement and less income.  0 interest rates only compound the problem when you have no other source of income.

No one here remembers  or has suffered in poverty for most of their lives:  the free cheese lines in the 80s.  3 to 4 hours standing  in line for a measly block of cheese.

This list shows how most dividends have been cut or reduced within the last couple of months:

Retirees depending on dividend income are on a massive diet, especially energy, hotels, shipping, reits

https://www.marketbeat.com/dividends/cuts/

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