Fundamentally, do you think we are in a dire economic period that is likely to endure and drag on for a long time….
….A period marked by stagnation, and high corporate profits, yet rising unemployment, higher taxes, and fewer opportunities…
….And topped with continued constipation in credit markets and corresponding tight credit and low growth for small businesses?
I do. Our current malaise is symptomatic of our over-leveraged society and it's going to take years for the debt – both good and bad- to work thru the system. And what works off debt the fastest? Low rates….
There is a lot of talk and noise about the threat of rising interest rates, inflation, and economic turmoil. But this article in the Huffington Post helps illustrate how interest rates are likely to stay low for the foreseeable future…
Some key points:
"Interest rates dropped during the Great Depression and stayed that way for 20 years.
"…rates in Japan dropped to near zero in 1995 and have stayed that way ever since."
"People have been betting on higher interest rates for over 25 years. And for over 25 years, they have been wrong."
Now, with our government in turmoil and most likely getting ready to kick the can down the road with a raise in borrowing limits, yet without meaningful spending cuts, there is certainly a strong possibility that rates will spike in the coming days/weeks.
But the longer term signs indicate we are in a long term low rate environment. In the years we have been publishing Annuity Straight Talk, we've seen rates go from 6% to 3% on fixed annuities and a new round of rate cuts for fixed and index annuities is on its way.
Some of our long time readers have been waiting to buy an annuity since we started writing, and some may be wishing they could have locked in at 5%.
A reader called just today who bought an Allianz Masterdex X in 2008 with a 12% bonus and 10% income rider. Now, it's 8% bonus and 7% income benefit, and may be falling further still.
The bottom line? Lock in your baseline guaranteed lifetime income. Do the best you can with what you have here and now, while preserving your options for future growth. Don't put off doing the right thing now, hoping for some different circumstances in the future.
The body of the Huffington Post story is below- it's well worth considering:
The Wall Street Journal had a recent article titled "Debt Hamstrings Recovery."
It noted that consumers have more mortgage and credit card debt than they did five years ago.
After the Wall Street bailouts, the debt of the United States seems off the charts, although the United States debt situation looks great compared to Greece and some other countries in Europe.
The Wall Street Journal quotes economist Carmen Reinhart in asserting that it takes seven years, on average, to unwind debt. Reinhart said, "The issue with debt is that you can't get rid of it quickly and can't rid of it nicely."
I recently had a conversation with Pete Mahurin, the Bowling Green, Kentucky stockbroker, banker and financial guru. I asked him if interest rates were going to spike upward soon.
He reminded me that interest rates dropped during the Great Depression and stayed that way for 20 years.
The Wall Street Journal article backs up Pete's observation. They quote former World Bank official, Liaquat Ahamed, who said that the Federal Reserve cut the discount rate below 2 percent in 1934 and it held at those levels until the mid 1950s.
Even more relevant, Ahamed notes that rates in Japan dropped to near zero in 1995 and have stayed that way ever since.
Mahurin had other thoughts on interest rates. He said that "Generals are often accused of fighting the last war instead of the one in front of them." Pete said that the baby boom generation grew up in a unique, high interest rate period of the 1970s, when inflation was insane and mortgages were near 20 percent interest rates.
You didn't see that spike before or after that post-Vietnam, post-Great Society, post-Watergate period.
I'm like the rest of the baby boomers. I've been waiting since 1981 for the rates to go back to 20 percent again.
Now I am starting to wonder if they won't come back up.
Mahurin told me that he grew up around people who had lived through the Great Depression. Many of them lived their lives waiting for deflation to return and were burned by the high inflation in the 1970s.
We have to look at all possibilities.
I started in the structured settlement annuity business in late 1982, when the rate of return on annuities was about 17 percent.
For all of my 29 years in business, I have met people who won't commit to an annuity because they are "waiting for interest rates to go back up."
I can understand some hesitancy. Immediate annuities are designed for the long-term and, usually, to last for a person's lifetime.
Dr. Richard Thaler, a professor of Economics and Behavioral Science at the University of Chicago, wrote an excellent New York Times piece titled, "The Annuity Puzzle for Retirement Investing."
Thaler said that given a choice of taking a lifetime annuity for retirement or trying to invest a lump sum, most would be better off with an annuity, but most take the lump sum.
Dr. Thaler calls this "the annuity puzzle." He gives a lot of explanations based on behavioral science, but one is obvious: Retirees don't want to commit to long term annuities. They think interest rates are going to go up.
People have been betting on higher interest rates for over 25 years. And for over 25 years, they have been wrong.
Could they be wrong again?
In the 1980s, I had a client who purchased large blocks of annuities to fund insurance claims. He was getting ready to purchase a million dollar block when interest rates went from 10 percent to 9.9 percent. He stopped buying, saying he would wait "until interest rates got back to 10 percent again."
He's been waiting over 20 years. Interest rates have not been back to 10 percent since that day. He finally made his move when they got to about 8 percent. He missed the chance at 9.9 percent, but locking in at 8 percent has worked out well compared to other alternatives.
In a few years, will people be saying the same thing about locking in at 4 percent?
Ahamed had an interesting perspective in the Wall Street Journal piece: "History shows that when people have borrowed too much, they stop borrowing and interest rates stay very low for a very long time."
The common assumption is that interest rates are going to go higher.
Just like the common assumption, for many years, that you couldn't lose in the real estate market.
Sometimes we have to consider the unconsiderable.
Like the possibility of lower interest rates.
Don't be on the wrong side of history. At www.AnnuityStraightTalk.com , we believe that trying to time the market is recipe for disaster- you need to do the best you can, with what you have, when you have it. The key is to maintain flexibility while you maximize profitability and safety.
Let us help you.
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