Earlier in the month, a prime rate that is used as a benchmark for the 10-year Treasury note went up to 1.85 percent. This number is still very low, and it will more than likely remain around this range even through to the beginning of 2020. Don’t mistake this as a prediction, but as a viewpoint that is being real about what the interest rate has been like as of late.
There have been some misconceptions or beliefs from those that do not have much experience in finance that think that the rates fells due to the 2008 crash and that the rates are still trying to recuperate from the event. However, that isn’t really the case. The 10-year Treasury note rate from earlier this month was under the rate that it was in 2008, around the time that the crash was really taking effect.
Since about a decade ago, the rate on the 10-year Treasury note has been slowly declining. However, it is known that prices on bonds do go up and down and down and up, as assets do in active markets. In the fall of 2018, the rates were around 3 percent on the note before worries set in about the trade wars going on between the U.S. and China, along with concerns about the global economic growth decelerating.
Though rates of unemployment have been at a historical low, the Federal Reserve lowered its interest rate three times this past year. For many, it is uncertain as to why the interest rate–which is supposed to neutral–is showing no signs of reversing in the other direction of increasing into higher numbers.
Generally, interest rates aren’t really an individual’s focus unless they are looking to finance a big purchase, such as their education, a new home, or a vehicle. However, Baby Boomers will need to really think about such rates in regards to investing in low-risk vehicles to have a stream of income coming in during retirement.
When this generation was getting their feet wet with adulthood, the 10-year note was higher than 15 percent, and interest rates on mortgages were showing double-digit numbers. This was due to inflation, but the low rates that we see now are also due to inflation as well.
No one is certain as to when things will balance out again.
For investors that are frustrated with the current rates can sometimes unknowingly go looking for trouble while searching for higher yields. For instance, if an investor is not happy with a CD rate of 1.4 percent, they might look to invest in a real estate deal or a high yield mutual exchange fund.
But with higher yields come higher risks.
When it comes to real estate, some investments turn out well. However, there are also investments in real estate that end up going south, eating the equity used to invest in it.
Instead of running after high gains, it may be better for you to look into liquid investments that may perform better than the bonds due to the low-interest rates. Stocks tend to do much better than bonds, but bonds are more low-risk and steady.
One type of fund that is quite common is a target-date fund. You will invest in a fund that is based on the year that you retire. An adviser that is in charge of your fund will manage your investments, and as time gets closer to your retirement, the more conservative the investments will be.
You may wish to research different funds, as there are many to choose from. There are even many that are low cost, such as PIMCO that has 12 different options that you can invest in. Five years before retirement, this fund will only have about 50 percent of your investments in stocks. Typically other funds may keep about 65 percent of your money within stocks five years before your retirement.
No matter what percentage it maybe when it comes to how much is invested within stocks or what fund you may be invested in, you want to make sure to rebalance your portfolio. For instance, if the investor has 60 percent of their investments in stocks, and they had a great year of yields, the portfolio may be at 65% by the end of the year. You will want to rebalance your account by selling off some of your stocks and purchasing bonds.
Another thing to consider is to handle your investments as large foundations do. They payout 5 percent annually, no matter how the portfolio performed. If they did not receive 5 percent through interests, they would generally sell some of their investments to reach that amount.
To do this for an individual, it is recommended to try for a 4 percent yearly payout. However, if you are mostly invested in bonds, such as the 10-year Treasury note, the most you could pay yourself would be $1,850 at 1.85 percent on $100,000. However, to pay yourself 4%, you would have to sell some of your bonds, which would eat your investment.
A better way to do this is to invest 85% of your investment money into a set of funds that is diversified while setting aside about 15 percent in your checkings. That way, you will have funds to pay for any bills or other expenses for 3 or 4 years. This would be an easier way to have your investments pay you 4% a year due to having investments in multiple funds.
You don’t necessarily have to do this, but it is something to consider in regard to how you can receive income during your retirement when interest rates are low.