As the European Central Bank today cut its overnight lending rate to .15 and its deposit rates for banks to -.10 supposedly to try and force lending into the stalled European economy, ECB head Mario Draghi emphatically insisted this morning: “It’s completely wrong to suggest we want to expropriate savers”. Yet that is precisely the effect. With years now of misguided central bank initiatives, these policy-makers and leaders have truly become the enemy of prudent savers everywhere.
American households remain, on average, the wealthiest in the world today. According to US Census data, the median household income for those 65 and older is $34,000, and $66,000 for those 55 to 64. In a era where the safest 10 year US government bonds are yielding less than 2.6% (similar or less in most other developed nations) and even the highest capital risk junk bonds are yielding just 5% (the lowest ever in history), a household needs savings of more than $1 million outside of the family home in order to collect investment income of $34,000 a year before tax. Less than 8 percent of the U.S. population (less than 26,000,000 people) has a million dollars in savings.
And yet,at historically high pricing in equities and corporate bonds, one of the worst things people can do is to follow mainstream investment advice and increase their portfolio risk to try and reach for higher yields today. To do so is to open oneself up to the near certainty of capital loss in the next down cycle (ala 2000-02 and 2007-09).
We are living through one of the most dangerous periods in history for anyone with savings to lose. Now more than ever, the math of retirement calls for some extremely sober thinking. Rather than putting unreasonable hope and faith in exotic financial products and strategies, people are likely to fare much better with practical plans such as working longer, retiring later, or continuing some part-time employment, downsizing expenses, relocating–everything that can help us to make budgets balance.
The next market wash out will bring investment prices back to more reasonable yields with much lower capital risk. Until then, the best solutions today are practical, careful steps, that focus on preserving principal, first and foremost. The good news is that unlike wild markets and desperate, demented central bankers, our own behavior and financial choices are all within our own control. And that is powerful knowledge to have.
Here is a direct video link.