Low interest rates are great for borrowers buying homes, cars, and capitalizing business ventures. Over the last dozen years, the very low interest rates have been accommodative to those taking loans, but low rates also have their victims. I often refer to people born between the mid-1940s and early 1960s as the interest rate victim generation. Back when this generation were starting their families, buying homes, cars, and beginning their careers, interest rates were exceptionally high compared to current rates. A young couple with good credit buying their first house in the mid-1980s could expect to pay between 12 – 15% interest. Today that number is probably closer to 4% and even lower than that in many cases.
To provide some context, borrowing $100,000 and paying it back using a 30-year mortgage at 15% equals a total pay back of $455,198. At 4% interest the total payback drops to $171,868. That is a $282,330 difference just because of when you were born!
Despite paying all this interest, incredibly, many folks have still been able to accumulate wealth to invest or to fund retirement. Aging towards, or in retirement, often means taking lower risk in many financial circumstances. The challenge…safe or conservative investments such as CDs, fixed annuities and high-quality bonds, hardly pay anything as they are based on current low interest rates. The interest rate victim generation; held hostage by interest rates both then and now.
As you can read in this week’s Weekly Market Review there is another victim of the current low interest rates; pension funds which coincidently are impacting the unfortunate interest rate victim generation. There are solutions to mitigate this problem and our team is well-prepared to help you best understand those options that may be a good fit for your situation.
As always, we hope you find this week’s Weekly Market Review both informative and interesting.
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Trevor N. Coe, CFP