Federal Reserve Policy--Why You Should Care

It was probably 2010 when, in conversation with a candidate for US Congress, I realized how few people have made the connection between the interests of retirees and Federal Reserve banking policy. I had pointed out the link between low yield and the difficulty of funding pensions and private retirement funds, with the assumption she’d already have seen what I was talking about. “What do you mean, it’s immoral for the Federal Reserve to suppress rates?” she asked.

I was surprised. This lady is a law professor, though her expertise is not in estate planning, and I just assumed that it had occurred to all people in positions similar to hers that the Federal Reserve’s manipulations to achieve low interest rates would hurt the elderly. In the past, it was commonplace for people to put aside some savings on the assumption that the return from ordinary interest payments on those savings would ease their retirement years. When bank deposits and CDs yield negative to slightly more than zero, the choice is between significant risk of loss and no return. So seniors expose themselves to losses—and often suffer them—or they see their standard of living reduced by the unavailability of low-risk yield. Combine that with rising longevity and some inflation, and the Federal Reserve’s insistence on making it easy for debtors to take on more debt translates to a policy of favoring risk-takers and the young over older generations’ need for low-risk real return on investment.

Seven years in, the situation for savers has not improved, and financial commentators are noticing the result. WealthManagement.com highlights the changed recommendations those advising prospective retirees should be making. To me, they sound basically impossible, especially for low income earners and those who put off saving. If you have the foresight to start putting aside funds at 25, the average projected savings rate should be about 10% (7-16%+) to fund retirement on a life expectancy of 85+ years. If you wait until you’re 35, researchers expect you’d need to put away 24% of your income, annually, if rates continue low.

Either this rate of savings doesn’t happen, or consumption across American households drops dramatically—the very effect the Federal Reserve’s policy has been trying to avoid.

I am incorporating a review of one’s expected retirement “burn rate” in my counsel and encouraging clients to consider significant lifestyle revisions to free themselves from the need for a relatively high replacement income level in retirement. The likelihood of there being a substantial estate to pass under the plan I formulate with clients is a factor we discuss as clients decide the complexity of planning they’re willing to pay for. And long-term care costs loom even larger as life expectancies increase against our low-rate backdrop, because unlike yield on safe investments these days, health care costs of all kinds keep jumping substantially each year. Because of the magnitude and level from which these financial forces are being wielded, though, there is little I can do for clients except to adjust retirement expectations in light of the numbers, prepare their plans in light of those adjusted expectations, and put them in touch with informed financial advisors.

If you believe your planning should be informed by broad understanding of current demographic, social, and financial trends, we may work well together. Give me a call at 651.280.0002.