The Fed’s Collateral Damage to Retirees

I have discussed the various “side-effects” of the Federal Reserve’s zero interest rate policy (ZIRP) including a depreciating dollar (causing large cost of living increases), and people experiencing no interest earned on bank accounts (which hurts seniors’ income)  – which causes conservative savers to take extended risks to earn some yield (junk bonds yield what CD’s did just a decade ago).

YES YOU! Look Here

Another consequence that I want to bring to you attention is the effect of ZIRP on pensions. If you are receiving or expecting pension payments, pay attention here. Typically pension portfolios blend stocks and bonds. And managers have to manage the large sum of money so that it can pay out pension payments each year and still grow to cover future years’ payments. And historically, pension managers could earn 5-7% on the bond side of their portfolio by investing in US government bonds and high quality corporate bonds. With a solid 5-7% yield, it was easier for pension managers to hit their target returns.

For example:

Lets assume that a pension manager is trying to earn 8% on the portfolio. And this manager has split the portfolio – 50% in bonds and 50% in stocks. And let’s assume 2 scenarios: one with high quality bonds yielding 6%, and one with high quality bonds yielding 3%.

If bonds yield 6%, then stocks would have to earn 10% to earn the target 8% return (1/2 bond portfolio earning 6% + 1/2 stock portfolio earning 10% = blended 8%). If bonds yielded 3% however, then stocks must earn 13% to blend an 8% return.

Which is more realistic – stocks earning 10% or 13% average YEARLY? And many would say 10% is too high.  Either way, the pension manager must take MORE STOCK MARKET risk to offset the lower bond yields (thanks Ben Bernanke!).

Bottom line – Ben Bernanke and the Federal Reserve have created numerous casualties as “side effects” in their efforts to bail out banks and prop up stocks. Millions have been terribly harmed – lower lifetime pension income or no bank interest to pay the property tax for example –  and for many it’s irreversible. And let’s not even get started on the price increases in food, energy, taxes, insurance premiums, services, copper and other metals, and other items that we must spend money on, caused by monetary inflation. Shame on the Fed – really.

Your Action Plan

it’s hard to come up with exactly the right plan for each person but here are some things to consider:

1. If you’re involved in a pension that is not insured by the pension benefit guaranty corp, and you can roll over the money to an IRA, consider that move

2. If you’re being offered a pension payment, compare it to rolling over an IRA and purchasing an annuity in the marketplace

3. If you can hold off taking the pension and keeping it growing, consider that strategy – as opposed to annuitizing at a lower rate today

4. Be careful about taking too much risk with your nest egg by investing in higher yielding but more risky investments. The choice may be to live on less now because the alternative – losing capital – may not be preferable!

Do you have questions? Drop a comment here and let’s discuss.

Do make sure you visit with a professional  – financial planner, accountant, attorney, anyone who can guide you in a good direction – before making major planning decisions. Having a 2nd and maybe 3rd set of eyes looking at a problem can help!