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The interest rate double-edged sword

By John Sullivan

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The equity rout of the past 18 months has done damage in its own right. But a singular focus on market volatility has consequences far beyond the day’s open and close. As Ed Lotterman writes in the Pioneer Press, low interest rates are killing retirement accounts, something few boomers are hip to.

“The problem is not the drop in asset values. We put our money where my mouth was by mid-2007, after having opined for years on the unsustainable trends underpinning the U.S. economy, and moved the last of our funds out of equities. So we have not lost anything in the stock market.

It is rather low interest rates that are eroding the retirement income projections we started to make when I got into my 50s. And we are not alone. Fellow boomers who are fretting about how far their 401(k) balances have fallen should pay more attention to how real investment returns barely above zero will affect them. For many, ongoing depressed interest rates will have a bigger long-term impact than whatever has happened to stock prices since mid-2007.

This all illustrates an old but harsh fact: Interest rates are a two-edged sword that can cut brutally when falling as well as when rising. What benefits one group in society savages another.”