Jul 11, 2017
Pattie Lovett-Reid: Some seniors would love to see higher rates
Not everyone is dreading a rate hike.
Seniors who have been savers on a fixed income, not wanting to take on more risk by investing in the market, are in for a little bump in income.
Now it isn’t likely to be a large movement, earnings on savings vehicles are lower than at any other time in recent history, so you will want to shop around.
Here’s the good news: Financial institutions want your money even in a competitive environment. An increase of 25 basis points isn’t much, but in time, an increase as low as one per cent is preferable to losing money in the stock market.
Retirees are often in wealth preservation mode and can tend to park their cash in safe havens such as savings accounts and GICs. Given the miserable rate of return some have waded into the bond market. Now is a good time to ladder your investments to take advantage of potentially higher rates down the road.
If you are a senior looking to create a retirement income stream from an annuity payment, low rates have undercut this strategy in recent years. Low rates equal low payments and many have been discouraged from converting. As rates start to head higher it is time to review your options, stagger your purchases and be comfortable with the financial strength of the organization you decide to do business with. You might want to consider annuitizing only a small portion to cover off fixed costs and take a wait and see in terms of rate movements.
Long-term care insurance helps to cover off age-related health issues that could potentially save you and your family thousands of dollars. Due to this low interest rate environment, premiums have continued to grow. Here’s why: as interest rates fell, insurers saw the return on their investments fall as well. Seniors may have been tempted to delay buying long-term care insurance but that, too, has its risks – you don’t know what tomorrow will bring.
Higher rates might help with the premium costs and be a welcomed relief to seniors.
Finally, there’s one more wildcard for seniors in retirement – inflation.
Clearly inflation isn’t a challenge today sitting at roughly 1.3 per cent, but low rates are intended to encourage borrowing and stimulate the economy.
It appears to have been working, however. “Cheap money” has the risk of setting off inflation. Higher inflation brings with it higher costs not likely to be offset by higher rates paid to seniors.
If the Bank of Canada decides to move rates higher sooner than later there is a better chance of keeping inflation under control. Higher rates and lower inflation help to increase the purchasing power of seniors.
