4-Rakesh Shah 2.qxp_A4 Temp 02/07/2018 14:05 Page 4
Will rising interest rates necessarily make life easier for those seeking retirement? The economy needed saving and the world managed to pull it off by dropping interest rates to record lows for an abnormally extended period. Whilst this was clearly a victory for the governments it may not have been good for anyone seeking retirement. Such was the extent of the cuts to interest rates, all previous records were smashed and new tactics were created (quantitative easing) to support global economies. Save giving a long explanation, the net effect was to give the global economic engine a steroid injection to stimulate growth and promote borrowing for the purposes of greater investment. Rakesh Shah, Ten Point Trading
as it worked? Well if you define success as the health of many Western the economies, then we can probably say yes, but sadly in the process many millions of retirees that were heavily reliant upon interest income paid on assets, for their pensions, the nightmare had begun. The recent increases in interest rates have provided little change (both here and in the USA) to the net incomes of most retirees. There is little pleasing to say about the modest increases (many banks have not passed these increases on to consumers in the form of higher interest rates). The next few years I expect will remain challenging, with little change expected to make meaningful life changing levels of interest income for pensioners. There should be a higher cause for concern for those looking to retire. A number of surveys show that over half of all workers have underestimated the impact of this new paradigm on their savings plans for retirement. Many will be woefully underfunded in the decades to come. Please read the article I wrote for this magazine where I speak about the power of compounded interest. This may be the saving grace for many future retirees, as a small change now, can yield life changing results in later years. The reality is that the community is going to face a big challenge in years to come regardless of future interest rates, as many years have passed and future retirees have not taken sufficient action to remedy shortfalls in money that needed to be
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invested to reach the desired goals. So what can be done? Firstly we need to acknowledge where we are and also revise our expectations. For a baby born today, life expectancy will average around 78 years and for someone who is just turning 70, they can probably expect to be celebrating birthdays at 84. Most people will live longer than they expect and this means that they have more time to make decisions. The pressure to make retirement decisions hastily (i.e. my personal lifetime is running out fast) should be avoided. Secondly, although rising interest rates are generally considered a negative drag on future stock market growth, the increases have been very modest and are rates are forecast to continue to rise slowly. So far, stock markets have not shown any signs of weakness due to rising rates. So equity portfolios are rising nicely helping to retirement goals to be met. Thirdly, rising interest rates will have minimised impact on any current incomes of retirees, as the sources of income will be mostly highly diversified. This means there will be little impact on current income levels. Try to look for better savings rates for your investments. Savings tables published online will compare the best deals around. Some accounts require a monthly fee to access these higher rates of interest, but they do provide users with added benefits, such as insurance policies. Each account must be considered on its own merits. Review your portfolio more frequently (bi-annually or quarterly), so that you
FINANCE, BANKING & INSURANCE - Asian Voice & Gujarat Samachar 2018
can adapt to changes faster getting advice rapidly when you feel you need it. A number of corporate bonds will begin to look more attractive as they offer higher yields when interest rates go up. This will certainly be more common with newly issued bonds. Longer term deposit rates will continue to rise, so locking into fixed rates for longer periods of time (e.g. 5 years) will need to be considered against locking in for shorter periods (1 to 2 years) as interest rates may be higher in 2 years’ time, enabling retirees to take advantage of any interest rate rises if they invest again at this time. The increased interest earned when locking money up for 5 years instead of 2 years many not justify the lost opportunity of earning a higher rate in say 2 years when the deposit matures. A more aggressive stance would be to consider stocks that are not highly rate sensitive. This could be an opportunity to adjust an equity portfolio. Specialist advice should be taken. As you make changes a long term strategy should be followed, so that you minimise the number of changes to your portfolio preventing high expenses incurred with changes. Rising interest rates will provide some limited opportunities, but some work will be required to make the most of these changes. Rakesh Shah is a keen Investor and Consultant working with HNWI’s and family offices for investment opportunities. www.TenPointTrading.com For more information please get in touch. (Rakesh.Shah@TenPointTrading.com)