We could say that the war on baby boomers’ savings comes from two fronts. On one side they have been hit by low interest rates and from the other, it was the Dow.
Perhaps these graphs say it all:
Where are we going? To baby boomer nest eggs.
ZIRP (Zero Interest Rate Policy) and the Dow
Reflected by the dip in the prime rate (Figure 1), the Fed took interest rates way down when the economy contracted from December 2007 to June 2009. While ZIRP is supposed to make borrowers happy, it really depresses savers. Hit by low rates, those savers have the incentive to look elsewhere for a higher return. The problem though is that the Dow has them nervous. Afraid of a 2008 repeat (Figure 2), savers are minimizing risk by retaining cash.
Add the war on two fronts to how baby boomers underestimate what they will need and you get an inadequate nest egg:
Our Bottom Line: Low Interest Rates
Ranging from our tendency to select short term spending over long term saving, to miscalculation, to living longer, and to modest home value increases, the reasons for the retirement shortfall are varied. Every list though includes low interest rates. With typical Americans saying they have 65 percent of their net worth in cash instruments and the Fed having only begun its rate hikes, we can ask if the war on savers is really ending.
So, with interest rates our focus, let’s conclude with Merle Hazard’s newest song. Called “How Long (Will Interest Rates Stay Low)?”
